Page 354 - מיזוגים ורכישות - פרופ' אהוד קמר תשפב

determine at the outset how much stock it will have to issue (and thus can determine its
per share earnings impact with some certainty). Most large strategic stock mergers
involving U.S. financial institutions have been structured with a fixed exchange ratio
without collars or walk-aways.

With a fixed exchange ratio, however, the seller’s shareholders, if they choose to
hold their stock through to the closing, are at the risk of the market, both for financial
stocks .generally and the acquiror’s stock in particular.

2. Pricing Formulas and Collars

Some measure of price protection for the seller’s shareholders may be obtained
by using a dollar pricing formula: the number of shares to be issued by the acquiror at the
closing is determined on the basis of the value of the acquiror’s stock at that time or,
more frequently, on the basis of the average price of the acquiror’s stock over a period
(e.g., ten to 20 trading days) prior to the closing or, if applicable, the date on which Federal
Reserve approval is received. Seller shareholders are protected because, if the buyer’s
stock price has declined in this period, the exchange ratio is increased in inverse
proportion to maintain the same dollar level of consideration. Seller’s shareholders who
continue to hold the acquiror’s stock post-closing still have the risk of stock price
fluctuations after closing.

When a pricing formula is used to price-protect selling shareholders, a collar can
limit the risks to the buyer of exchange ratio adjustments arising from stock price
fluctuations. A collar protects the acquiror by placing an upper limit on the amount of
stock it will be required to issue in the event of a decline in the price of its stock between
signing and closing, but will still protect the seller’s shareholders by placing a floor on the
number of the acquiror’s shares they receive when the merger closes. Within the collar,
which in negotiated bank acquisitions is frequently 5-15 percent more or less than the
acquiror’s stock price at the time the deal is signed, the acquiror is assured of issuing, and
the seller’s shareholders of receiving, a number of shares having a value equal to the
agreed-upon dollar deal price. Collar protection is limited because, once the share price
is outside the collar range, no further adjustments are made and the exchange ratio
becomes fixed at its upper or lower limit.

Pricing formulas without collars limiting the risk of downside stock price
movement to the seller are unusual among major transactions, although they are
sometimes seen. For example, the former Cendant’s initially hostile attempt to acquire
American Bankers Insurance was structured as a cash tender offer for just over half of
American Bankers common stock, followed by a back-end merger in which each American
Bankers share would be converted into $67 worth of Cendant common stock based on
stock valuations near the closing date, with no collar. After signing, Cendant’s stock fell

350