Barbarians: selling the sale?
Bargaining, in the Arabian-bazaar sense of the term, is not negotiation; rather, it is the process of vendor and consumer each trying to sell the other a story that anchors expectations, particularly emotional expectations, into a range the proponent has decided is feasible.
Got that?
That’s the game that both Blackstone and Vornado have been playing, jockeying for position in the minds of shareholders, with the following sequence which we’ve chronicled with bystander glee: Blackstone $48.50 (12/1/06); Vornado $52 (1/24/07); Blackstone $54 (1/26/07); Vornado $56 (2/1/07). The most recent bid is summarized in this slightly breathless New York Times update:
The bruising fight over Equity Office Properties, the nation’s biggest office landlord, has entered its final round. But neither side has managed to land a knockout blow.
What makes this ‘bruising’? It’s an auction, pure and simple.
Vornado Realty Trust appeared to have the edge yesterday as it raised its bid to $56 a share in cash and stock, or $41 billion, topping a bid of $54 a share from the private equity giant Blackstone Group.
As a participant in a pure bargaining situation, you must use your actions and bids to tell a story, and the essence of a good story is credibility and convergence. Take a look at the bidding sequence in tabular form:
|
Bid |
Player |
Date |
Interval |
|
48.50 |
Blackstone |
12/01/06 |
– |
|
52.00 |
Vornado |
01/24/07 |
54 |
|
54.00 |
Blackstone |
01/26/07 |
2 |
|
56.00 |
Vornado |
02/02/07 |
7 |
The speed of Blackstone’s first riposte would ordinarily lead one to expect them to be able to bump the price yet again,
Are you ready for my next move, Vornado?
but Blackstone was giving out vibes it was going to stand on its last bid:
Blackstone said yesterday that its offer was still superior to Vornado’s. Many analysts agreed.
“This is not enough to entice shareholders to wait the extra two to three months,” Sri Nagarajan, an analyst with RBC Capital Markets, said of Vornado’s offer in a note to investors. “We expect the $54 all-cash Blackstone offer to be deemed ‘superior’ by the weekend.”
What do the markets think? For after all, the markets are the voters:
Vornado’s improved offer came up short of expectations that it would be $57 a share. And shares of Equity Office fell 40 cents yesterday, to $55.15 — higher than Blackstone’s bid, but lower than Vornado’s, perhaps in a sign that investors expect Blackstone to raise its offer again.
Nonsense; the price dip suggests that the market is either (a) unsure whether the shareholders will take the Vornado bid, or (b) discounting the Vornado bid’s in-kind portion.
Being wooed gives me a headache
Any bid has three elements: economic expectation, certainty (or volatility), and timing/ contingency. Blackstone has plumped for the clean-and-fast approach: cash, now.
A deal with Blackstone, which had struck a deal last year to buy Equity Office at $48.50 a share before raising its bid in response to Vornado’s, could be completed by Feb. 8.
Vornado has countered with a more complex proposition: a bit more value, a mix, and a bit of time:
It might be Christmas, or it might be war?
Vornado’s offer, which includes assumption of $15.3 billion in debt, has some risks. While worth $2 a share more than Blackstone’s offer, it consists of $31 in cash and $25 in stock, which could fall depending on market conditions. (Blackstone’s offer is all cash.)
If we presume there are no tax advantages of taking stock rather than cash — if Vornado’s stock has an expected post-transaction decline of 8% ($2/$25), then Blackstone’s would be superior on economics. Vornado has taken steps to protect against the stock fall:
To protect against a decline in the stock, Vornado has included a “collar” that protects the value of its offer as long as Vornado’s shares remain between $115 and $135 a share. The shares surged 2.8 percent yesterday, to $125.74.
Vornado’s offer also comes with a time risk: it could take several months to be completed and requires shareholder approval.
This could happen while the clock keeps ticking
Now let’s return to the volatility question:
Vornado, the giant real estate investment trust run by the shopping mall magnate Steven Roth, may have one major advantage over Blackstone regardless of price. Some of the biggest shareholders of Equity Office are real estate investment funds that hold big stakes in the company, like Cohen & Steers. Because most REIT investors have to keep all of their assets invested in REIT funds, some may prefer to accept Vornado’s offer because they would otherwise have to reinvest the cash generated by a sale to Blackstone in shares of companies like Vornado anyway.
That’s the problem with cash — it earns nothing when sitting idle. Instead it must be immediately reinvested, and if you like Vornado as a stock, why extract yourself in cash, why not move straight into it?
“The Vornado offer is superior and potentially better than cash,” James Corl, chief investment officer for Cohen & Steers, Equity Office’s biggest shareholder, told Bloomberg News.
Mr. Zell himself put out an entertaining infomercial, complete with a voiceover by Sam himself (”this imbalance will require five years or more to return to equilibrium”), cheesy graphics, and a warbled witty ditty, “Capital is raining on my head,” explaining why he thinks that global yield rates will drop.
“Everything is liquid/ we’re awash with cash to spe-end!”
(You have to sing it!)
If that is so, people should pay a lot to buy income streams, like — why, purest coincidence! — quality office buildings.
Nevertheless, how you choose depends a lot on who you are: a long-term investor, or a short-term market rider:
At this point in the bidding contest, however, it is unclear how much of the shareholder base of Equity Office is still made up of REIT investors and how much has been turned over to hedge funds and arbitragers. There are some indications that many REIT investors have already sold their shares in Equity Office.
Before all this occurred, Equity Office’s stock was languishing in the $40 range (see chart in this post). The price zoomed on the first tender offer, and rose again, so if you were buying it based on the speculation of rises, you might be interested in cashing out now.
In any pure-bargaining game, the trick is to bring biding sequence, price, and timing, all together in a symphonic crescendo; your goal as a buyer is to convince the seller that you have, in a fit of irrational exuberance, offered just a smidgen more than you dispassionately should.
I’m going to walk away any minute now
You want to convince the seller that you’re overpaying. Vornado appears to have made a good play at doing just that:
“If Blackstone comes back at $58, we’ll give them a big hug, [said Mr. Corl]. “Right now, we’ll give Vornado a big hug.”
James Corl wants to hug someone
Equity Office, the real estate investment trust run by Samuel Zell, will decide this weekend which offer to accept.
Show me the money!
Or Mr. Zell and Equity Office may decide to change the rules yet again …
