Managing M&A Risk with Collars, Earn-outs, and CVRs*


  • *

    The authors would like to thank Avanhidar Subrahmanyam, Ajay Subramanian, Yakov Amihud, Bill Megginson, Enrique Arzac, Ian Cooper, Jason Draho, Adam Shepard, and Don Chew (the Editor) for helpful comments and suggestions on various drafts of the paper.


M&A transactions expose both the bidder and target shareholders to a number of major risks both prior to the close of the deal and during the post-close integration phase. The main pre-closing risk is the possibility that fl uctuations of bidder and target stock prices will affect the terms of the deal and reduce the likelihood the deal closes. After the closing, a major risk for bidder shareholders is the failure of the target to perform up to expectations, thus resulting in overpayment.

This article describes a number of tools that can be used to manage such risks, using a number of examples to illustrate the structure and pricing of such tools. In the case of pre-closing risks, offers with “collars” can protect target company shareholders from a drop in bidder company share prices while at the same protecting acquirers from excessive dilution. Post-closing instruments such as earn-outs and contingent value rights can be used to manage the risk of substandard performance and the overpayment that would result from underperformance.