Mergers and Acquisitions: Collar Contracts
34 Pages Posted: 24 Jun 2016
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Merger and Acquisitions - Collar Contracts
Date Written: April1 27, 2015
Abstract
Collar offers and walking-away rights have become popular tools in mergers and acquisitions (M&A) transactions. In this paper, we price fixed-price collars and fixed ratio collars and evaluate the commonly included right to terminate the M&A transaction before the closing date. We show that the right to walk away from the M&A deal can increase the value of the deal substantially. Collar offers are usually more beneficial to the target company's investors with a constant relative risk aversion utility function than the traditional all-cash payment and stock-for-stock payment of the transaction. In our model, terminating the deal before the closing date usually increases the expected utility of target investors.
Keywords: mergers and acquisitions, collar offer, derivative, risk management, walk-away option
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