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The Market Pricing of Implicit Options in Merger Collars

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  • Micah S. Officer

    (Marshall School of Business, University of Southern California)

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. Hypothesizing that the market should price both sources of value implicit in a collar merger bid, I value the implicit collar options and find 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.

Suggested Citation

  • Micah S. Officer, 2006. "The Market Pricing of Implicit Options in Merger Collars," The Journal of Business, University of Chicago Press, vol. 79(1), pages 115-136, January.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:115-136
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    File URL: http://dx.doi.org/10.1086/497407
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    Cited by:

    1. Chen, Sheng-Syan & Chou, Robin K. & Lee, Yun-Chi, 2011. "Bidders' strategic timing of acquisition announcements and the effects of payment method on target returns and competing bids," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2231-2244, September.
    2. Liu, Tingting & Wu, Juan (Julie), 2014. "Merger arbitrage short selling and price pressure," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 36-54.
    3. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.
    4. Weitzel, Utz & Kling, Gerhard, 2012. "Sold below value? Why some targets accept very low and even negative takeover premiums," MPRA Paper 42832, University Library of Munich, Germany.

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