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A lesson in bargaining, Medibank-style

Have you ever bargained? Has that special thrill of securing the once-in-a-lifetime bargain ever travelled up your spine? Have you, as the seller, laughed behind the aforesaid bargain hunter, savouring the thrill of their hallucination?

On the other hand, have you felt the pangs of pain piercing through your veins when you realised that the wonderful bargain you bought was available at half the cost at the fixed price store, and with full warranty to boot? Or as the seller you gave away a costlier piece?

Minister Mathias Cormann, who flogged Medibank Private’s Interesting Public Orgy (known as the IPO), used the bargaining method to great effect, but unlike the normal parties owning or acquiring the goods, he was neither. He acted as the agent for the taxpayers of Australia.

Even this is disputed by policyholders of Medibank. They claim that the Government never paid for its stake, and has sold their property for a cool 5 billion. Nice one, if you can get it.

Bizarre in the bazaar

So the good Senator rushes into the bazaar, where the wise, angelic or otherwise, tread warily. As those who have shopped in any Asian, South American or East European bargain basements would know, these are populated largely by touts, hangers-on, window-shoppers and price surveyors with a 1% incidence of shopper-crowd ratio.

He is promptly surrounded by merchant bankers, lead managers, brokers, accountants and advisers: ‘rent-seekers’ in trade parlance, who make their money regardless of whether the market stays up, down, sideways or comatose. In fact, whether the market remains at all. The true mark of a professional being making money, regardless.

With their professional help, how much stock to unload, what preferences and discounts to offer, in what time frames and when to hang up the shingles are all decided. Brokers are caught up in this endogenic frenzy, as they bid up their clients’ needs to secure firm allocations.

On the hallowed principle that ‘your money is safer with me than you’ (equivalent legal lingo: ‘possession is nine-tenths of the law’, the other 40% being consumed by counsel fees. Never count on them to count), the purchasers are asked to deposit more than they would eventually be liable for. The interest earnings would fund the Christmas party nicely, thank you.

The frenzy gets to the stage where the agent selling for the owner in the bargain basement plays, like a seasoned veteran, on the psychology of the bidders: will they sense losing out and bid for more? This is the moment you see in the souk when the shopkeeper thrashes his hands about in confected disgust, speaking in an unknown tongue. No translation needed: ‘raise your bid, or lose out’. In IPOs, the strange tongue takes the form of a product disclosure statement. Like Mark Twain’s classic, it is praised but never read.

During the actual sales period, the veiled threats continue. Did you hear that the issue is being several times oversubscribed? Is it likely that the issue will close earlier than the closing date? Did you know even firm allocations will have a haircut?

Like the clever shopkeeper in the souk, interested purchasers are streamed into multiple queues: pre-registered and general, stratified into policyholders, employees and the public. They may not know what either they or anyone else is doing in the queue, but it helps to behave as they did.

Subtle suggestions (or brazen shouts) about early bidders getting favoured treatment works like a treat. Everyone wants to be a favourite and rushes in, so no one is.

Come announcement time, our bargaining agent enlists, for a fee, those with the sharp pencil and the mind of an abacus to determine the basis of allocation. Like a treasurer with an unquenchable thirst for tax, he makes up a sliding scale, consisting of several tiers showing the allocation at each range: x shares up to A applied for, plus y% of any excess above A. Symptomatic of the crudity of the entire spectacle, y is usually a vulgar fraction. Are mathematicians into psychology?

People call up the brokers, the hotline and each other to understand what they got. Schadenfreude reigns: that the other mob fared worse than us is sweet music to the auditory receptacles.

On the appointed day for deferred settlement, our agent and the guy who will be left with the bathwater (a pity, really, about the baby) wear the smile of the cat that got the cream and shake up the polished bell vigorously. Something about the orgy must have polish to it, after all.

Not much left on the table

Would the heavens open up and financial nirvana be nigh? Zillions of eyes peer into the trading screen.

No record-breaking debut, this. A measly paper profit for the punter and even less for the ‘savvy’ institutions. As ennui sets in, the price dives below the insto-price, and with it goes the dream of powering up the portfolio performance. As the market settles back into its usual stupor, the hangers-on ready themselves for their next orgy.

As for the market price itself, it’s not quite settled. Will the disaffected policyholders sue for compensation? Will they vote with their wallets and walk, destroying value?

Who knows? As the philosopher Hume taught us in epistemology, inductive inferences are worth nothing, being circular. To prove them you must believe in them.

What about Mathias, our bargain agent? He finds that bargaining, like itching, can give a pleasant sensation but only as long as the scratching continues. He should look for more. Is this the first recorded case of agency risk infecting the agent, rather than the consumer as hitherto?

Bargain bazaars always imprint their lessons:

  1. Investing for the long term and reacting to the first few days’ price is like planting tomatoes and uprooting them each day to see if all is well. Messy, and fruitless.
  2. As in any IPO bargain, some (sellers) win; some (brokers) wine; the rest (index investors) whine. Win-win, it sure ain’t.

 

Ramani Venkatramani is an actuary and Principal of Ramani Consulting Pty Ltd. Between 1996 and 2011, he was a senior executive at ISC /APRA, supervising pension funds.

6 Comments
Ramani
December 19, 2014

OMG Tim, has that wily Mathias taken my hint and sold Medicare as well? I missed that...

Tim
December 16, 2014

Michael, Medicare was built with taxpayer funds by a government agency, therefore when it is sold the sale proceeds go back into the pool of money that is known as 'taxpayer funds' or consolidated revenue.

Call it what you will, but the sale proceeds will be used for govt expenditure on critical infrastructure Australia needs.

You don't own Medibank any more than you own the Harbour Bridge or Opera House.

Ramani
December 14, 2014

Michael

Very cute logic. Next time you are in Canberra, we may find you sound asleep at the Lodge, as you (presumably) own it already. I am sure Tony will accommodate you....

Michael
December 14, 2014

As a taxpayer, didn't we pay for Medibank already? I participated in the Telstra sale and my thoughts in the end were why am I paying for something I already own?

Capital Markets Guy
December 13, 2014

What I don't understand with the Medibank sale is why it makes sense to taxpayers: at a sale price of $5.5 billion, paying off debt would save about $165 million a year in interest payments, but the Government foregoes about $400 million a year in dividends, plus share price appreciation.

Richard Lambert
December 12, 2014

For a private purchaser how would ACCC view an offer to sell by a corporation

1 We will tell you the price in due course
2 you must pay a deposit which will be more than what you will end up paying
3 Because we will not tell you how many you will get but your payment will be held by us
4 We will tell you how many you bought and at what price
2 We will refund you any surplus above your deposit but without interest

 

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