A lot has been made of the rise in price of corn and soybeans and its affect on the bid by BHP (NYSE:BHP) for Potash Corp. (NYSE:POT), but in truth short-term fluctuations in price have little to do with valuations of a company, and if BHP raises its bid as a growing number of people believe, it shouldn't and probably won't be based on temporary crop prices.
BHP CEO Marius Kloppers has made it clear if the deal doesn't add value to shareholders, he will back away from it.
The challenge for Kloppers is he's under increased pressure to grow the company, and there simply aren't that many companies that can affect the bottom line in a way to satisfy shareholders.
So he can't pay too much for the company, but he also can't be perceived as too stingy if he does in fact lose the bid. Two prior attempts by Kloppers to make deals have failed, and he will be perceived as someone who can't get the job done or is attempting to make the wrong deals.
In the case of the recent failure to merge iron ore operations with Rio Tinto (NYSE:RIO) that was the case, so he now has to walk a fine line.
The failure of the Rio deal did have a positive effect on BHP, as it added over $5 billion to the company war chest for the Potash deal.
One caveat to the statement made about the short-term price of crops is if it is indeed considered a short term event. If it is, Potash will have to make the case for a higher bid price, if not, BHP will have to justify their price if it is thought crop prices will continue to hold or go up.
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