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