A board has two bids: Rs 1,000 crore conditional on financing with an 85% chance of closing, or Rs 950 crore fully committed. A failed deal leaves a standalone value of Rs 700 crore and six lost months. Which is worth more, and what reverse break fee would make the higher bid clearly better?

The bids are worth about the same: Bid A is 955 on expected value, about 949 once the six-month delay is priced, against a certain 950. Bid A only beats Bid B if its closing odds are above about 85%, which is the bankers' estimate itself. A reverse break fee of about Rs 89 crore keeps A ahead even at 80% odds, and gives the buyer a reason to close.

Weight each outcome by its chance and price the time lost. A bid is worth its price only if it closes; otherwise it is worth what the seller is left with, later. It is like choosing between a job offer at Rs 10 lakh that depends on the company's funding round and a certain offer at Rs 9.5 lakh: if the first falls through, you are back to searching. Here: 0.85 x 1,000 + 0.15 x 661 = 949.2, where 661 is Rs 700 crore received six months late, discounted at 12% a year.

Very, which is the real point. Bid A beats Bid B only if its chance of closing is above 85.2%, a hair above the bankers' own estimate. At 80% Bid A is worth about Rs 932 crore, Rs 18 crore behind. The 85% is a judgement about debt markets months from now, so a board relying on it is betting the difference on a number nobody can measure. And the failure branch is probably worse than Rs 700 crore: a business that has been through a failed sale often loses staff and customers who heard about it.

A reverse break feeA payment the buyer makes to the seller if the deal fails for reasons on the buyer side, such as financing falling through. adds money to the failure branch. Size it so Bid A still matches Bid B if the closing odds are 80%: 0.8 x 1,000 + 0.2 x (661 + F) = 950 gives F of about Rs 89 crore. At the bankers' 85%, Bid A with that fee is worth about Rs 962 crore. The fee also changes the odds themselves: a buyer who must pay Rs 89 crore if its financing fails works harder to secure it, and asks lenders for committed rather than best-efforts terms.

Close with the board's judgement. With no fee, take Bid B: it is worth the same and carries no risk. With a fee near Rs 90 crore and committed financing letters, Bid A becomes the better offer. The limit of the arithmetic is that the probabilities are estimates and the fee size is a negotiation; the method shows the board what it is trading, not what the other side will accept.