Contingent value rights: Difference between revisions
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Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence also protecting the acquirer against [[valuation risk]]; |
Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence also protecting the acquirer against [[valuation risk]]; |
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Price protection CVRs are granted when [[Mergers_and_acquisitions#Stock |payment is share based]], providing a [[hedge (finance)|hedge]] against downside [[price risk]] in the acquirer's equity. [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=424903] |
Price protection CVRs are granted when [[Mergers_and_acquisitions#Stock |payment is share based]], providing a [[hedge (finance)|hedge]] against downside [[price risk]] in the acquirer's equity. [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=424903] |
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Under either, they may be separately tradeable [[Security (finance)| securities]]. |
Under either, they may be separately tradeable [[Security (finance)| securities]]; occasionally acquired by specialized [[hedge fund]]s. |
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In the first case, CVRs are granted [https://www.fool.com/investing/2018/10/19/what-is-a-contingent-value-right.aspx] |
In the first case, CVRs are granted [https://www.fool.com/investing/2018/10/19/what-is-a-contingent-value-right.aspx] |
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Revision as of 15:20, 3 January 2020
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In corporate finance, Contingent Value Rights (CVR) are rights granted by an acquirer to a company’s shareholders, [1] facilitating the transaction where some uncertainty is inherent. These rights typically take either of two forms:[2] Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence also protecting the acquirer against valuation risk; Price protection CVRs are granted when payment is share based, providing a hedge against downside price risk in the acquirer's equity. [3] Under either, they may be separately tradeable securities; occasionally acquired by specialized hedge funds.
In the first case, CVRs are granted [4] in scenarios in which the acquiring company does not wish to pay for a product that might not work, has a limited market, or might need significant investment; whereas on the other side, the acquired company “wants to get full value for its assets”. The CVR then “helps bridge this negotiation”. Under these rights, shareholders will receive additional cash, securities, or benefits if a specific and named event occurs - one where the value of the firm significantly increases - within a specified timeframe. CVRs are very common in the biotech and pharmaceutical industries; they are also often granted to shareholders in companies facing significant, value accretive restructuring.
The second case, protection against price risk, is facilitated by specifying that payment will be made at an averaged, as opposed to final, share price; a floor may also be set. [5]
Under both, the CVR is then a form of option.[6] The first case: analogous to a call option, the payout to the CVR holder will be triggered by the event occurring, and will be zero otherwise. To determine the value of these rights, [7] analysts will apply a modified option pricing model based on the probability of the event, the time horizon specified, and the corresponding payout rules; see contingent claim valuation. The second: the CVR takes the form of a modified Asian option.