Managing M&A Risk With Collars, Earn-Outs, and CVRs

16 Pages Posted: 11 Dec 2006

See all articles by Stefano Caselli

Stefano Caselli

Bocconi University - Department of Finance

Stefano Gatti

Bocconi University - Department of Finance

Marco Visconti

Merrill Lynch & Co.

Abstract

M&A transactions expose both the bidder and target shareholders to a number of major risks both prior to the close of the deal and during the post-close integration phase. The main pre-closing risk is the possibility that fluctuations of bidder and target stock prices will affect the terms of the deal and reduce the likelihood the deal closes. After the closing, a major risk for bidder shareholders is the failure of the target to perform up to expectations, thus resulting in overpayment.

This article describes a number of tools that can be used to manage such risks, using a number of examples to illustrate the structure and pricing of such tools. In the case of pre-closing risks, offers with collars can protect target company shareholders from a drop in bidder company share prices while at the same protecting acquirers from excessive dilution. Post-closing instruments such as earn-outs and contingent value rights can be used to manage the risk of substandard performance and the overpayment that would result from underperformance.

Suggested Citation

Caselli, Stefano and Gatti, Stefano and Visconti, Marco, Managing M&A Risk With Collars, Earn-Outs, and CVRs. Journal of Applied Corporate Finance, Vol. 18, No. 4, pp. 91-104, Fall 2006. Available at SSRN: https://ssrn.com/abstract=950422 or http://dx.doi.org/10.1111/j.1745-6622.2006.00115.x

Stefano Caselli (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Stefano Gatti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Marco Visconti

Merrill Lynch & Co. ( email )

World Financial Center - North Tower
19th Floor
New York, NY 10281-1319
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
44
Abstract Views
2,304
PlumX Metrics