Fixed-Dollar Value Collar

What Is a Fixed-Dollar Value Collar?

The fixed-dollar value collar alludes to a strategy that a company acquired during a merger might apply. Through this method, the company can shield itself from changes in the share price of the getting company.

A collar alludes to an options trading strategy where the trader stands firm on a long put situation, a short call position, and is long shares of the underlying stock. The protective component includes holding shares of a given stock, while likewise purchasing protective puts and selling call options against the holding. Both the puts and calls are out-of-the-money (OTM) options, with similar expiration month and equivalent in the number of contracts purchased.

How a Fixed-Dollar Value Collar Works

A fixed-dollar value collar is one of two types of collars helpful during mergers and acquisitions (M&A) deals. It is intended to safeguard the target company's assets, conveying a steady dollar value for every one of the dealer's shares even on the off chance that the getting company's stock price ought to drop. The aim of the fixed-dollar value collar is to be a circuit breaker, which could hinder critical losses. By setting a floor and ceiling on the stock part of an acquisition deal, the company doing the purchasing will focus on conveying a fixed-dollar value of its stock for each share of the company that will be acquired.

Fixed-dollar value collars set the exchange ratio for the merger or acquisition deal. The ratio decides the share exchange level for the company being bought to exchange its shares for the shares of the obtaining company. This exchange ratio will vacillate inside the collar, as the strategy gives a floor and cap — least and maximum levels for the exchange.

Considerations With Fixed Dollar Value Collars

An article in 2014 from Harvard Law School investigated a few parts of M&A strategies. "A number of factors play into the recharged appeal of stock deals, remembering an undeniably bullish outlook for the C-level suite and higher and more stable stock market valuations, as well as deal-explicit drivers like the requirement for a significant stock part in tax inversion transactions," specialists composed.

"A portion of the potential pitfalls inherent in a fixed value structure are quickly clear — missing extra protections, on the off chance that the acquirer's stock price drops among signing and closing, the acquirer is at risk of experiencing the dilutive effects of giving more stock than initially anticipated."

The specialists added that such a dilutive impact could make an acquisition less appealing to the buyer. Additionally, it could bring about "enough shares being issued to require endorsement by buyer stockholders under stock exchange voting requirements or by making adequate dilution trigger change of control provisions in debt, incentive equity or other key agreements.

"On the flip side," they stated, "an exchange ratio that differs in light of value could likewise cause issues assuming an acquirer's stock price increments definitively — e.g., by making the number of shares be issued to fall below edges pertinent to accomplish an ideal tax treatment."

Features

• A fixed-dollar value collar is an options strategy employed during a merger to hedge against changes in the share price of the getting company.
• Fixed-dollar value collars set the exchange level for the company being bought to exchange its shares for the shares of the obtaining company.
• Utilizing both put and call options, the strategy sets both a floor and ceiling on the stock part of the acquisition deal.