GAME THEORY – AN APPLICATION IN THE TATA –CORUS DEAL

Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others.
The deal between India’s Tata Steel and the Anglo- Dutch Corus Steel group which was the 9th largest producer of steel in the world was a strategically planned deal. Tata Group faced cut throat competition from Companhia Siderúrgica Nacional (CSN) which is a Brazilian company.

A bidding process was involved in the acquisition of the Corus group. The UK takeover panel set up the rules for the bidding. Of the maximum 9 rounds 8 will be for the suitors to table a fixed price bid in cash. In the event of competitive situation continuing a final round would be held to give chance to the bidders to outbid the other within a ceiling that has already been informed to the panel. There has to be a difference of 5 pence for each round of the bid between the two suitors

Before the Game

Tata had two had two options to bid or not to bid and CSN also had the same two options. However, CNS already had a 4 % stake on Corus. For every increase of pence the share price of Corus would increase by $ 4 million and CNS would also have its share.

Dominant Strategies: Tata had a dominant strategy to bid because by bidding Tata will have the advantages of developed markets, new patients, advance R& D of Corus.

CNS’s dominant strategy would also be to bid cos if it competes with Tata on the bidding the share price of Corus would raise and CNS would benefit from the same as it had a 4% stake in Corus.

The Game

On October 5, 2006, Tata Steel confirmed its interest in acquiring Corus. Tata Steel proposed a $7.6 bn bid for Corus at 455 pence a share in cash on October 26, 2006. Brazil’s CSN made an indicative bid of 475 pence a share on November 17, 2006. At this, Tata Steel raised its bid to $9.2 bn at 500 pence per Corus share on December 11, 2006. CSN in response made a formal bid of $9.6 bn at 515 pence a share in cash on the same day. This process of bidding after one and other is an example of sequential games. Sequential games (or dynamic games) are games where later players have some knowledge about earlier actions. This need not be perfect information about every action of earlier players; it might be very little knowledge. In this deal of Corus steel, both Tata Steel and CSN were aware of the bidding prices and each other’s strength in the deal.

After the various bids offered by both Tata steel and CSN , the UK Takeover Panel set January 30, 2007 as the deadline for Tata Steel and CSN to make their revised offers which would be the final offers for the acquisition of the Corus group. This bid like every bid in the real world is a finite, (9 rounds) discrete game that has a finite number of players (Tata Steel & CSN), moves (Bidding), events, outcomes (Acquisition).

After The Victory

We have been discussing the Tata- Corus deal from the angle of the acquisition of Corus. Post acquisition of Corus also explains a few game theory concepts.
The bid of Tata for Corus and Corus accepting the bid is an example of Nash equilibrium, as both Corus and Tata benefited from the deal. As mentioned earlier, Tata will have access to developed markets by this acquisition. It would also have its product mix enhanced with the high value product from Corus and more over it can also have the excellent R& D facilities of Corus. They can break the supply chain and produce parts of it where it makes sense, for Tata steel. It means producing the semi finished goods at locations where it has raw materials support and cost efficiencies and then making the finished products in the market where it gets the value i.e. China, South East Asia and European countries. As Tata is taking over the company the Corus will have better management skills high Value for its shares. A coordinated solution through collaboration has led to the potential for greater gains for both.

To conclude Tata Steel’s acquisition of Corus shows how coordinated strategies can yield greater benefits even in a competitive marketplace. The strategic fit of Corus’s range of high-end products and know-how, and its access to developed markets, combined with Tata’s low-cost access to ore, efficient basic steel production, and its own market access certainly provided a great deal to the steel industry of India and the world at large.

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