Merger and Acquisitions - Collar Contracts

34 Pages Posted: 20 Mar 2012 Last revised: 18 Jun 2014

See all articles by An Chen

An Chen

Ulm University - Institute of Insurance Science

Christian Hilpert

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

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Date Written: June 17, 2014

Abstract

Derivatives termed collar offers have become popular in mergers and acquisitions transactions. In this paper, we price the two most popular types of collar offers, fixed price and fixed ratio collars, and value the commonly included right to terminate the transaction before the closing date. Furthermore, we investigate the welfare implication of collar offers for the target company's shareholders. Our numerical results show that collar offers mostly reduce price risk incorporated in both all-cash and stock-for-stock deals and consequently improve the welfare of the target. In our model, the feature of terminating the deal before the closing date usually increases expected utility of target investors.

Keywords: mergers & acquisitions, collar offer, walk-away option, pricing, welfare analysis

JEL Classification: G13, G32, G34

Suggested Citation

Chen, An and Hilpert, Christian, Merger and Acquisitions - Collar Contracts (June 17, 2014). Available at SSRN: https://ssrn.com/abstract=2025854 or http://dx.doi.org/10.2139/ssrn.2025854

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 (University) College ( email )

Guangzhou
China

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