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Fixed Dollar Value Collar

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Dictionary Says

Definition of 'Fixed Dollar Value Collar'

A floor and cap on the stock component of an acquisition transaction, within which the purchasing company agrees to deliver a fixed dollar value of its stock for each share of the target company. In a fixed dollar value collar, the exchange ratio i.e., the ratio at which the target company exchanges its shares for those of the acquiring company, will fluctuate within the collar, while the floor and cap fix minimum and maximum levels for the exchange ratio.

The fixed dollar value collar is one of two types of collars used in M&A transactions, and is geared toward protecting the seller or target company's interests. This is because it delivers a constant dollar value for each of the seller's shares even if the acquirer's stock price plunges. The other type of collar, the fixed number of shares collar, is more beneficial to the buyer or acquirer because it limits share dilution.

Investopedia Says

Investopedia explains 'Fixed Dollar Value Collar'

For example, assume BigCo announces a deal to acquire SmallFry at a 25% premium to the latter's closing price of $10, when BigCo's stock was trading at $20. The exchange ratio in this case is therefore 0.625 (i.e. $12.50 / $20). SmallFry is concerned about the possibility of BigCo's shares trading significantly lower by the time the transaction closes in three months time, since this would mean that the currency it has been paid in (i.e., BigCo shares) is worth substantially less than it was worth when the deal was announced.

SmallFry and BigCo therefore enter into a fixed dollar value collar of 10% on either side of the $20 midpoint. The floor price for this collar is therefore $18, with a cap of $22. This means that within the collar, the 0.625 exchange ratio adjusts to ensure that each SmallFry share is exchanged for $12.50 of BigCo stock.

If BigCo shares plunge and are trading at $16 when the deal is nearing completion, SmallFry shareholders would get 0.6944 (i.e. $12.50/$18) BigCo shares for each of their shares. The $18 floor ensures that SmallFry shareholders receive at least this dollar value of BigCo shares when the transaction closes.

Conversely, if BigCo shares surge and trade at $25 as the deal nears completion, the exchange ratio would be fixed at the cap level of $22, for an exchange ratio of 0.5682.

Directory (Option Strategy)

  1.

    Alligator Spread

  2. Atlantic Spread

  3. Back Fee

  4. Backspread

  5. Bailard, Biehl And Kaiser Five-Way Model

  6. Bear Call Spread

  7. Bear Put Spread

  8. Bear Spread

  9. Bear Straddle

  10. Box Spread

  11. Bull Call Spread

  12. Bull Put Spread

  13. Bull Spread

  14. Bullet Trade

  15. Butterfly Spread

  16. Buy A Spread

  17. Calendar Spread

  18. Call Ratio Backspread

  19. Collar

  20. Collar Agreement

  21. Condor Spread

  22. Contingent Order

  23. Conversion Arbitrage

  24. Covered Call

  25. Covered Combination

  26. Covered Straddle

  27. Credit Spread

  28. Death Put

  29. Debit Spread

  30. Delta Hedging

  31. Delta Neutral

  32. Delta Spread

  33. Diagonal Spread

  34. Dividend Arbitrage

  35. Double One-Touch Option

  36. Fence (Options)

  37. Fiduciary Call

  38. Fixed Dollar Value Collar

  39. FMAN

  40. Forex Hedge

  41. Forex Option & Currency Trading Options

  42. Form 6781: Gains And Losses From Section ...

  43. Front Fee

  44. Gut Spread

  45. Heston Model

  46. Horizontal Spread

  47. Implied Volatility - IV

  48. Interest Rate Collar

  49. Iron Butterfly

  50. Iron Condor

  51. Leg

  52. Leg Out

  53. Long Jelly Roll

  54. Long Leg

  55. Long Put

  56. Long Straddle

  57. Long-Term Equity Anticipation Securities ...

  58. Married Put

  59. Modidor

  60. Multi Index Option

  61. Multi-Leg Options Order

  62. Naked Call

  63. Naked Put

  64. Negative Butterfly

  65. Net Option Premium

  66. Neutral

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  68. Outright Option

  69. Overwrite

  70. Overwriting

  71. Positive Butterfly

  72. Protective Put

  73. Put

  74. Put Calendar

  75. Put Ratio Backspread

  76. Ratio Call Write

  77. Ratio Spread

  78. Reverse Calendar Spread

  79. Reverse Conversion

  80. Risk Reversal

  81. Roll Down

  82. Roll Forward

  83. Roll Up

  84. Seagull Option

  85. Sell To Open

  86. Series 4

  87. Short Leg

  88. Short Straddle

  89. Straddle

  90. Strangle

  91. Swing Option

  92. Synthetic Dividend

  93. Variable Ratio Write

  94. VIX Option

  95. Writing An Option

  96. Zero Cost Collar

  97. Zomma

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