Winner's Curse

Article summarized by Sam Mishra, MBA (MIT Sloan)

In a bidding war, if the winner overpays to win a bid, the phenomenon is known as Winner’s Curse. Is Winner’s Curse a good thing, or is it bad, or even ugly? It depends on the strategy of the firm. The following example of Oracle's PeopleSoft acquisition throws more light on this phenomenon.

Example: Oracle outbid its rivals to buy PeopleSoft. Some analysts thought that Oracle was paying too much for PeopleSoft’s assets. However, Oracle’s corporate strategy included acquiring Siebel Systems as well. After Oracle and PeopleSoft merged, the combined company could acquire Siebel Systems easily, thus eliminating / consuming / annihilating a strong rival. Tom Siebel had started Siebel Systems after his ideas were rejected by Oracle’s Larry Ellison. Larry Ellison got ego satisfaction, not to mention Siebel’s superior CRM suite of application software, by acquiring Siebel. Ultimately, The Oracle-PeopleSoft-Siebel merger has resulted in a strong application software company, which can battle with SAP on equal terms. Prior to these acquisitions, Oracle was a database company: now it can boast to be one of the top two application software companies as well, the other being SAP, of course. So, even though Oracle might have suffered from the Winner’s Curse through the PeopleSoft acquisition, that curse was temporary.

Also see Pareto Frontier.