Deals exist because buyers and sellers place different valuations on assets. More to the point, when buyers place higher values on a company than sellers, deals can be made. In theory, a necessary condition for deals to occur is a ZOPA, a zone of potential agreement between buyers and sellers. For example a seller thinks a company is worth at least 30 euros per share and a buyer is willing to pay 35 euros. The ZOPA is between 30 and 35 euros. Where will the deal occur? If it does occur, it should happen between 30 and 35, the exact value depending on the bargaining power of the two sides.
But a deal won't always happen in a ZOPA. In fact, evidence indicates that often deals occur outside a ZOPA and fail to happen inside a ZOPA. Negotiations can be complicated and influenced by all sorts of behavioral and economic factors beside the raw numbers. A seller may be turned off by the aggressive nature of a bidder, even when an agreement could be reached. A buyer may turn against a deal in the face of increased uncertainty in the economy.
The latter seems to be the case in the oil industry. A report in the Dallas Morning news reports that deal are in limbo after the recent drop in oil prices. In our terms, the ZOPAs have disappeared.
All the best,
Ralph
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