ZOPAs, Zones of Potential Agreements, Oil Prices as a Catalyst

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

Listening, Understanding and Deal Structure

Continuing our more detailed examination of the 14 keys to acquisition success

4.     Listen – and remember what you say may not be what is heard.  Also, what is said may not be what is meant!

In the words of Paul Simon, "A man hears what he wants to hear and disregards the rest..."

Anyone who has ever been in a relationship knows that what is said may be different from what is heard.  Moreover, what is said may even be different from what is meant.  It's true in romantic relationships, it is true in parenting, and it is true in negotiating the deal.

We can't structure a deal until we understand the parameters that are important to both sides of the transaction.  To structure a winning deal we have to understand the zone of potential agreement (ZOPA) and exactly what that looks like to all concerned.  That is, what are the specific objectives of the selling and buying parties?  

Remember our previous discussion about the interrelated nature of deal design.  It is not just about price.  There are so many factors that could be important to a buyer or seller and each one of these creates an opportunity for deal design.  Let's think about just a few of the specific factors that could matter to a seller:

• Price - obviously, more is preferred
• Taxes - less is preferred
• Form of payment - cash is certain, stock gives upside and downside potential and creates uncertainty
• Legacy - founders want to preserve the company name, retiring CEOs want their records intact
• Employees - executives often want to protect their employees from spinoffs, layoffs and other disruptive actions
• Control - existing CEOs generally expect additional compensation to relinquish control; boards of directors may be reluctant to give up seats
• Speed - a fast transition is generally preferred
• Social terms - where will the new, merged company will be headquartered? who will be CEO?  how will the board be structured? what will it be called?

We could continue for quite some time but let's stop for now.  First, however, note how each of these items influences others.  Form of payment determines the tax structure and affects the speed of the transaction.  Payments to retiring CEOs impact price and ultimately rate of return, etc.  Thus, each of the factors are interrelated.  Recognizing the tradeoffs is the first step to proper deal design. But deal design, in turn, starts with listening.  What are the expectations and desires of the acquiring firm?  What does 'Control' really mean to the selling party?  Plus, in a world of myriad aspects of deal design, which of these are the most important to the other party?  What are the relative weights assigned to each?  In other words, 'What really Matters?'

All of these factors produce a rich palette from which to craft a negotiation that looks like a win on both sides.  It starts, however with listening.  Many of us working in mergers and acquisitions are naturally attracted to numbers.  We enjoy analysis and projection and never saw a spreadsheet or graph that couldn't hold some interest.  But the numbers on our spreadsheets are based on the inputs from people on both sides of the deal - people from finance and accounting but also marketing, law, operations, and management.  Buyers - and sellers.  All people.  Consequently, it is even more important that we stop and remember a quote attributed to author Larry Barker:

""Effective listeners remember that 'words have no meaning - people have meaning'.  The assignment of meaning to a term is an internal process; meaning comes from inside us. And although our experiences, knowledge and attitudes differ, we often misinterpret each other’s messages while under the illusion that a common understanding has been achieved."

Before you structure the deal, remember: what is said is not always what is heard or meant!

All the best,

Ralph