So, Ultimately for Deccan Chronicle, it Boils Down to an Ultimatum

The chronicles of Deccan Chronicle have been covered by the media extensively so I won’t go there. The stock price tells the story quite vividly. Take a look.

Since Jan 2008, the stock’s down 96% while the market is down 7%.

What’s an IPL team worth when its owner’s have no staying power? Between zero and whatever someone will pay for it, no? Cash flows really don’t matter. But then, they never mattered in IPL team valuations anyway.

In the end, it boils down to an Ultimatum.

Imagine that you are travelling on an airplane, sitting in an aisle seat next to an eccentric-looking woman in the middle seat (Vivian). Next to her, in the window seat, is a rather formal-looking businessman (Mark). About 30 minutes into the flight, Vivian interrupts you and Mark, and explains to you that she is quite wealthy, becomes bored easily on flights and likes to pass the time by playing games. She then pulls fifty $100 bills out of her wallet and makes the following proposition. “I will give the two of you this $5,000 provided that you can agree on how to split the money. In the splitting up the money, however, I will impose two rules. First, Mark must decide how the $5,000 is to be split between the two of you. Then, you (the reader) will decide whether to accept the split. If you do accept, then you and Mark will receive the portion of the $5,000 based on Mark’s allocation. If you do not accept the split, then you and Mark will each receive nothing.” Both you and Mark agree to play the game. Mark thinks for a moment and then says, “I propose that the $5,000 be split as follows: I get $4,900 and you get $100.” Now it is up to you: Will you agree to this split?

Before you jump to a conclusion, let me say that you will never meet Mark and Vivian again, and $100 is better than nothing. Take it or leave it?

The position of Deccan’s creditors is not much different from yours in the Ultimatum game. They have already rejected a “frivolous” bid for its IPL team and even though media reports say that the team has been sold, they also say that it’s franchise has been cancelled.

Whether BCCI will reverse its decision or not — at a buyer’s request who will pay BCCI the money it says it’s owed by Deccan — is difficult for me to say. But if the existing buyer develops cold feet, a new buyer may offer a much lower price for the IPL team.

For Deccan’s creditors, the choices are miserable: (1) accept anything that’s offered; or (2) get nothing. Those were your choices too in the Ultimatum game. And that is just so sad.

As for Deccan’s shareholders, they are standing at the end of a long queue consisting of the firm’s creditors ahead of them. They should pray they get at least something out of this mess. Ultimately.


Note: The Ultimatum example was quoted from Max Bazerman’s excellent book, Judgment in Managerial Decision Making

7 thoughts on “So, Ultimately for Deccan Chronicle, it Boils Down to an Ultimatum”

  1. Quite a thought provoking article professor.
    Whats interesting to note is the gambling instinct of Mr. Mark. He’s willing to risk a sure shot $ 2500 falling in his lap (based on a 50:50 split which has a high probability of being accepted) for an additional $2400 where the probabilities of deal rejection are rather high.
    On Deccan: Acquiring a trophy business (or wife) brings out strong emotions (Ego) in people where sound financial logic goes for a toss.. (Case in point –>KFA) and shareholder capital is taken for granted.
    Can you ever imaging a bidding war over a Brick making enterprise??

    BTW: I personally would’ve accepted the $100 give away.

        1. Shouryamoy,

          That depends on how we define rationality. If money is everything and we focus on the individual alone, then yes. If people want to punish others for being unfair and create incentives for better behaviour in future, then maybe not. Tell me, there must be an amount at which the reader would decline Mark’s offer, isn’t it? A dollar? No? Ok then. How about 50 cents? 10 cents? 1 cent?

          Surely, there must be an amount offered by Mark that will make most readers respond with a “Fuck You” reply, no?

          And if that reply made Mark change his behaviour in the future, the world would be a better place, no? How can that be irrational?

          So it depends how you look at it.

          Let me frame the problem in another way. Would you pay 1 cent to teach a stingy, unfair Mark a powerful lesson? How much happiness would you derive by spending that 1 cent? And how much misery and regret you’d cause Mark by depriving him of $4,999.99?

  2. Its a great example. I think in DC case the previous bid of 900 cr was not far off from the current bid from the real estate company of 1,100 crs. But it seems they anchored to the price which was offered or expected by them when they were not in trouble and failed to see the current reality. Like Mark they are ready to risk the survival of their core business in order to get something extra from their IPL team. Or may be they think their alleged political clout will ensure their survival. After all they have Kingfisher as social proof. Moreover as somebody had said ““If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem”

    Thanks a lot professor and sincerely hope that you continue to post on your blog regularly. It’s really very useful for budding investors like us.

  3. If one looks at the bids which Deccan Chronicle received for their franchise, I am reminded of Warren Buffett’s quote which can be applied to the Creditors: “It’s not just whom you sleep with, but also whom they are sleeping with”. PVP Ventures or Prasad Potluri claim to fame was selling a random company to the fluff master Suresh Kalpathi in 2000 during the dotcom boom. Then Mr. Potluri thought otherwise in 2007 and buys back SSI, Mr Kalpathi’s company for 850 crores in 2007. On Mr Kalpathi here:

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