Mergers and acquisitions: collar contracts

Collar offers and walking-away rights have become popular tools in mergers and acquisitions (M&A) transactions. In this paper, we price fixed-price collars and fixed-ratio collars and evaluate the commonly included right to terminate the M&A transaction before the closing date. We show that the right to walk away from the M&A deal can increase the value of the deal substantially. Collar offers are usually more beneficial to the target company's investors with a constant relative risk aversion utility function than the traditional all-cash payment and stock-for-stock payment of the transaction. In our model, terminating the deal before the closing date usually increases the expected utility of target investors.