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prospects for the market for bank stocks, the size of the banking companies, the parties’
subjective market expectations over time and whether it is desirable or necessary to peg
the transaction price to a cash value.
As indicated above, in some transactions, pricing formulas and collars might be
felt inadvisable due to the potential downward pressure on an acquiror’s stock price as a
result of arbitrage trading. However, where there is little arbitrage risk, such as where
the seller is relatively closely held or where the acquiror is substantially larger than the
seller, a collar may be appropriate. Sellers should be aware, however, that a collar does
not only provide downside protection, it also customarily limits the upside potential in
the stock consideration.
In a pure sale situation, a seller might legitimately request the inclusion of
protective provisions such as a valuation formula, a collar and/or a walk-away. This is
especially true where the seller has other significant strategic opportunities available to
it, or where the agreement follows a market canvass or auction, in which case target
boards seem more likely to feel the need to "lock in" the superior value that resulted from
the process.
At the other end of the spectrum, in the merger of equals or "partnership" type of
transaction, claims on the part of the seller for price protection, especially walk-aways,
are less firmly based. The argument is that the seller’s shareholders, once the deal is
signed, are (and should be) participants in both the opportunities and the risks of the new
enterprise. Moreover, in both this type of transaction and a true acquisition, the seller
can always find some comfort, albeit less direct, with respect to acquiror-specific price
risk in the representations on the part of the acquiror relating to the non-occurrence of
material adverse changes and other warranties (the accuracy of which will be a condition
to closing).
B. Striking the Right Balance in Merger Consideration: Pricing Formulas and Allocation
Procedures for Mixed Cash/Stock Consideration
1. Overview of the Issues
When negotiating and structuring a part-cash, part-stock acquisition, it is
necessary to evaluate a range of complex variations and options without losing focus on
the key deal issues. Potential permutations can easily become unduly burdensome and
difficult to explain to investors. Accordingly, it is important to ensure that the
consideration of complex deal structures does not interfere with the core business deal.
There are a number of features that must be addressed to arrive at a final deal structure,
but not all decisions about these features will be equally important. If the issues can be
353
subjective market expectations over time and whether it is desirable or necessary to peg
the transaction price to a cash value.
As indicated above, in some transactions, pricing formulas and collars might be
felt inadvisable due to the potential downward pressure on an acquiror’s stock price as a
result of arbitrage trading. However, where there is little arbitrage risk, such as where
the seller is relatively closely held or where the acquiror is substantially larger than the
seller, a collar may be appropriate. Sellers should be aware, however, that a collar does
not only provide downside protection, it also customarily limits the upside potential in
the stock consideration.
In a pure sale situation, a seller might legitimately request the inclusion of
protective provisions such as a valuation formula, a collar and/or a walk-away. This is
especially true where the seller has other significant strategic opportunities available to
it, or where the agreement follows a market canvass or auction, in which case target
boards seem more likely to feel the need to "lock in" the superior value that resulted from
the process.
At the other end of the spectrum, in the merger of equals or "partnership" type of
transaction, claims on the part of the seller for price protection, especially walk-aways,
are less firmly based. The argument is that the seller’s shareholders, once the deal is
signed, are (and should be) participants in both the opportunities and the risks of the new
enterprise. Moreover, in both this type of transaction and a true acquisition, the seller
can always find some comfort, albeit less direct, with respect to acquiror-specific price
risk in the representations on the part of the acquiror relating to the non-occurrence of
material adverse changes and other warranties (the accuracy of which will be a condition
to closing).
B. Striking the Right Balance in Merger Consideration: Pricing Formulas and Allocation
Procedures for Mixed Cash/Stock Consideration
1. Overview of the Issues
When negotiating and structuring a part-cash, part-stock acquisition, it is
necessary to evaluate a range of complex variations and options without losing focus on
the key deal issues. Potential permutations can easily become unduly burdensome and
difficult to explain to investors. Accordingly, it is important to ensure that the
consideration of complex deal structures does not interfere with the core business deal.
There are a number of features that must be addressed to arrive at a final deal structure,
but not all decisions about these features will be equally important. If the issues can be
353
