Merger and Acquisitions - Collar Contracts

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