Bidding in Business Deals: Applications of Game Theory in Billion Dollar Sales
Link: https://www.wsj.com/articles/comcast-fox-to-settle-35-billion-takeover-battle-for-sky-in-weekend-auction-1537435073?mod=article_inline
In this article, authors Stu Woo and Ben Dummet discuss how the same strategies used to win fantasy football leagues will be applied in the bidding of Sky plc, a British media company, with a stock market value of $36 billion. The key bidders are Comcast Corporation and 21st Century Fox Inc. To complicate matters, Disney plc has already agreed to buy a portion of Fox, pitting the two conglomerates against Comcast, as working together to drive up the bidding prices benefits the two companies, even if they ultimately don’t win. Regulators resorted to an auction after Fox and Comcast engaged in a potential endless series of bids and counter-bids for the broadcaster. The auction will consist of a maximum of three rounds of bidding, of which the third round will be conducted with sealed secret bids.
This article and case demonstrates a real life example of game theory in action. In class and in the readings, we discuss how the underlying assumption behind modeling auctions is that each bidder has an intrinsic value for the item and the bidder is willing to purchase this item at no price higher than this intrinsic value. In sealed bidding auctions, players often have to figure out how high of a bid is needed to win without overspending or going over their true value. In this auction, Disney and Fox, who are on the same side of the table have a slight advantage. Since Disney already has a stake in Sky, bidding higher will allow Disney to “offload its Sky stake at a premium”, although it doesn’t necessarily have to sell (Woo and Dummet). In this scenario, it is interesting to consider what factors companies take into consideration when bidding. Is their best strategy to bid their true value, as in second price sealed auctions? Or, due to contextual factors, are companies likely to take risks and bid higher? It is fascinating to see the applications of game theory play out in business deals where the stakes are high and see how companies bid based on the knowledge they have.