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sharply on news not related to the deal. At the new trading level, Cendant would have
had to issue about four times as many shares as at the price level prevailing at signing,
drastically affecting the economics of the deal. Rather than proceed under these
circumstances, Cendant negotiated a termination with American Bankers and paid a $400
million termination fee.

While the Cendant situation was extraordinary, it does dramatically illustrate the
risk shift that results from pricing formulas, and the reason that acquirors will often insist
on a collar on a sliding exchange ratio. Where the buyer is much larger than the target,
collarless sliding exchange ratios are more common.

3. Walk‐Aways

In a number of transactions, parties also include termination provisions that give
the seller the right to walk away from the merger if the price of the acquiror’s stock falls
below a certain level during a defined period before closing. Thus, a walk‐away provision
would permit termination of a merger agreement by the seller if, at the time the
transaction is to close, the acquiror’s stock has decreased by a specified percent (e.g.,
usually 15 or 20 percent). An acquiror will argue that the seller should not be entitled to
absolute protection from general market risk. That is, if the acquiror’s stock does no more
than move down with the rest of the market or with the acquiror’s peers, there should
be no right on the part of the seller to "walk." Thus, many of the walk‐away provisions
found in major financial institutions deals have included "double triggers," both of which
must be tripped before a termination right may be invoked. These walk‐aways apply only
if (1) the acquiror’s average stock price prior to closing falls below a predetermined price
decline (e.g., 15‐20 percent) from announcement price, and (2) the acquiror’s stock falls
by over 15 or 20 percent relative to a defined peer group of selected banks during the
pricing period. An indexed walk‐away can provide a means (albeit imperfect) of
quantifying a "material adverse change" that provides the target with an "out" under the
contract. The difficulty with this approach is that the correct standard may be difficult to
define, and some weakness in the acquiror’s price performance may be due simply to the
market perception that it has paid too high a price for the target or skepticism that
projected cost saves will be realized (a perception which may be corrected with time).
Walk‐away pricing formulas are generally tested during a short trading period prior to the
consummation of the transaction and often include an option on the part of the acquiror
to increase the exchange ratio to avoid allowing the target to invoke the walk‐away right
(often called a "kill or fill" provision).

Walk‐aways and kill or fill provisions can create difficult issues for target boards,
depending on how they are structured. There have been instances in which the acquiror’s
stock price triggered the walk‐away provision as closing was approaching and in which
the acquiror∙ had indicated an unwillingness to "fill" to the full extent required by the

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