Anyone who has bid in an auction on ebay has learned that there are only a few winning strategies that participants use:
1. Bid low and early, in the hope that no one else will participate. You win the auction at the reserve price.
2. Bid very high immediately not in small increments. This frightens off competing bidders, especially if your bid is at or above a fair price for the item.
3. Snipe, which is waiting until the last second and making the smallest incremental bid to win the auction before the other party has time to counter.
These is a fourth strategy which generally doesn’t win:
4. Participate in the auction. That is bidding a little bit more than the last person at any time during the auction.
It’s pretty clear that Yanzhou is using strategy 1 (bid low and early) in their bid for Felix. Given the recent financial crisis it is unlikely that any competing bidder is going to have the stomach for strategy 2 (bid very high). That leaves an incompetent bidder using strategy 4 (participate) or a smart bidder using the one remaining strategy which is to try and snipe Felix.
Why does this matter? Because anyone expecting a counter offer should not expect it soon. Based on the published timeline, a counter offer can wait until November. There is additional benefit in waiting as the counter offer will be able to consider problems that the Foreign Investment Review Board (FIRB) has with the Yanzhou offer. Anyone looking to arbitrage a Felix buyout should wait for the excitement to die down. There is a good chance that you’ll be able to buy Felix at a lower price once the market believes that a counter offer isn’t coming. In fact, readers of this blog will know that a counter offer may yet arrive from a smart bidder.
I still expect a counter offer (>50% chance). The capital position of potential bidders is not great on the whole but this is counter balanced by the high ROI available from a counter bid. I don’t expect a counter offer in the next 4-8 weeks.
Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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