The Market Pricing of Implicit Options in Merger Collars

36 Pages Posted: 20 May 2005

See all articles by Micah S. Officer

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Abstract

Almost 20% of stock-swap merger bids contain collars that affect the payment received by target shareholders. I argue that a collar bid offers two sources of value to target shareholders: the basic offer premium and the value of the implicit collar options. I hypothesize that the market should price both sources of value implicit in a collar merger bid. I value the implicit collar options, and find that the market prices both the offer premium and option value equally. This suggests that market participants are cognizant of the fine print of merger agreements, and in particular implies that the two offer components are substitutable.

Keywords: Mergers and acquisitions, collars, method-of-payment

Suggested Citation

Officer, Micah S., The Market Pricing of Implicit Options in Merger Collars. Journal of Business, Vol. 79, No. 1, January 2006. Available at SSRN: https://ssrn.com/abstract=725321

Micah S. Officer (Contact Author)

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

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