Just yesterday, I wrote on the ill-advised acquisition that Luxembourg-based steelmaker Arcelor had announced -- the purchase of Canadian rival Dofasco.
At the time, the deal appeared badly planned for two reasons: First, strategically, Arcelor was aiming to grab a bigger piece of the U.S. market for steel used in automobile manufacturing. But with auto-parts maker Delphi in bankruptcy, General Motors (NYSE:GM) seeming determined to follow it down the hole, and Ford (NYSE:F) doing not a whole lot better, a Fool has to wonder just how big of an automobile manufacturing market there will be to share in coming years.
Now, buying access to a declining market isn't necessarily a bad thing. You just have to make sure you're getting a steal of a deal when you do it. The problem with Arcelor's bid for Dofasco, however, was that the Luxembourgian was aiming to pay far too much for its prize -- $3.7 billion in all -- to acquire a company with just $3.5 billion in sales. Thus we had a company (Arcelor) valued at 0.4 times sales, trying to pay nearly three times that valuation (almost 1.1 times sales) to acquire a company that sells steel into a declining market.
Wise? Only on Wall Street could that term be applied to this deal. But guess what? It gets worse.
Yesterday, we learned that Arcelor's deal is no longer the best on the table. Germany's steel giant, ThyssenKrupp, has offered a friendly -- as opposed to Arcelor's unsolicited -- buyout offer to Dofasco, proffering an incredible $4.1 billion. That's 10% better than Arcelor's bid from Dofasco's perspective, and anywhere from 10% to 100% more foolish (small "f") than ours. Here's why:
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10%: the amount by which ThyssenKrupp is upping Arcelor's bid, and securing the endorsement of Dofasco's board in the process.
- 100%: the relative difference in valuations accorded to the two rival bidders, as contrasted with the inflated valuation they're assigning to their target. Whereas the Arcelor deal would have had a company with 0.4 times sales overpaying for an unattractive target, ThyssenKrupp trades at just half Arcelor's valuation: 0.2 times sales. That makes ThyssenKrupp's bid for Dofasco "outrageously expensive" times two.
About the only way this situation could get sillier is if a bidding war were to break out, either with Arcelor returning to the table with a sweetened offer, or some even greater fool joining in the insanity.
Missed Part 1 of this story? Read it in "Arcelor's Arctic Boondoggle."
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
