Page 363 - מיזוגים ורכישות - פרופ' אהוד קמר תשפב

In this case, the parties could either allow all shareholders to elect between $10
in cash or $9 in stock (with some shareholders having a low tax basis still possibly
preferring the $9 per share stock option), or they could allow all shareholders to choose
between $9.50 in stock and $9.50 in cash, while adjusting the total number of target
shares that could be converted into stock to avoid requiring the acquiror to issue more
shares than it originally intended to.

In this instance, at an $18 price for each acquiror share, approximately 47.4
percent of the total deal value is now reflected in the stock portion, and accordingly, 47.4
percent of the total target shareholders could convert their shares into stock values at
$9.50 per share, and 52.6 percent of the target shareholders could convert their shares
into cash valued at $9.50 per share, while using the same aggregate consideration pool
that would be required for 50 percent of the shareholders to receive $9 in stock and 50
percent of the shareholders to receive $10 in cash.

Since this formula can be somewhat complicated to explain, parties have typically
included a chart as an annex to the merger agreement announcement and in the proxy
statement to show how the shares will be exchanged at different illustrative share prices
for the acquiror’s shares. The key points to understand (assuming a fixed pool of cash
and stock) are that:

 the value per target share of the cash and stock consideration will be the same
based on the pre-closing measurement period;

 if the acquiror stock price drops, the average consideration value will also drop,
but by a smaller amount than in a 100 percent stock deal, due to the partial hedge
created by the fixed cash component; and

 the exchange ratio will be increased to compensate for the drop in the average
consideration value such that the per share stock and cash consideration values
are equalized, but the total number of target shares to be converted to acquiror
stock will drop to compensate, such that the aggregate pool of acquiror shares to
be issued remains constant. Similarly, while the number of target shares to be
converted to cash will rise commensurately, the per share cash consideration will
drop such that the aggregate pool of cash required is unchanged.

2. Timing and Other Election Procedures

While equalization formulas are helpful to assure comparable stockholder
treatment and to avoid complaints, no such formula will be perfect, since there will
generally be some periods of time between the pricing period for determining the final
consideration, the election deadline and the closing of the transaction. When drafting
the procedures and time frames for setting final prices and for determining election
deadlines, it is important to keep a careful eye on the potential for arbitrage activity and

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