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The Market Pricing of Implicit Options in Merger Collars

  • Micah S. Officer

    (Marshall School of Business, University of Southern California)

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    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.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB790105
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    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 1 (January)
    Pages: 115-136

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:115-136
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

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