Mergers and Acquisitions: Collar Contracts

34 Pages Posted: 24 Jun 2016

See all articles by An Chen

An Chen

Ulm University - Institute of Insurance Science

Christian Hilpert

Sun Yat-sen University (SYSU) - Lingnan College

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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

Suggested Citation

Chen, An and Hilpert, Christian, Mergers and Acquisitions: Collar Contracts (April1 27, 2015). Journal of Risk, Vol. 17, No. 4, 2015, Available at SSRN: https://ssrn.com/abstract=2799661

An Chen

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Christian Hilpert (Contact Author)

Sun Yat-sen University (SYSU) - Lingnan College ( email )

GuangZhou, GuangDong
China

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