How Comcast and Disney are Using Auction Theory to Buy Sky
https://www.wsj.com/articles/blind-auction-complicates-bidding-for-sky-1537522201
This article discusses how blind auctions are used in company acquisitions. More specifically, a media company called Sky which has been valued at $36 billion is set to be acquired by either Comcast, Disney/Fox. Comcast and Disney will be bidding for Sky in an auction. The contest will run as follows: first, both companies will make bids known to each other. In the first round of bidding, the company with the lowest bid can make an increased bid for Sky. In the second round the company with the lower bid can make a higher bid. This can go on for multiple rounds, but in the third or fourth round they have to submit a sealed bid to a third party in which they will not know the competitors bid. It is extremely interesting that such huge, publicly traded companies use auction theory to make such major deals. However, the auction theory we learned is obviously a far more simplified version of what really happens. For example, in this situation, Fox already owns 39% of Sky. Disney is also buying a large share of Fox which includes the 39% of Sky, so it is incentivized to bid high for Sky so that it can in total have a huge stake in Sky for less. There are several other factors that impact the deal, such as Sky’s stock price, market conditions, other players, and company politics (a huge rivalry between Disney and Comcast). All of these factors complicate market conditions – context like this is something we have not considered in our version of auction theory. Of course, it is nearly impossible to generalize a theory for this since these differ on a case by case basis.
This scenario depicts exactly what we learned about auction theory in class. Both sides need to figure out how much to pay to win the auction while still spending the least amount of money possible. The third round sealed bid the article discusses is an example of a first-price sealed auction. In a first-price sealed auction, the winner is the player with the highest bid, and the winner pays the value of their bid. In this case, bidding true value is not the dominant strategy. The dominant strategy for Fox and Comcast would be to bid below their true value. Bidding the true value results in a pay off of 0 (bi-vi) regardless of if you win or not. Bidding more than the true value is not a good idea because it results in a pay off of 0 or a loss. Bidding below true value results in a payoff of zero or a gain. This is kind of auction is tricky, because you want to bid low enough to both win and maximize payoffs. Overall, this article shows a great real-world example of auction theory.