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.

BREAKING DOWN '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.

RELATED TERMS
  1. Collar Agreement

    An arrangement in a merger and acquisition deal that protects ...
  2. Zero Cost Collar

    A type of positive-carry collar that secures a return through ...
  3. Blue Collar

    A working-class person historically defined by hourly rates of ...
  4. Collar

    1. A protective options strategy that is implemented after a ...
  5. White Collar

    A working class that is known for earning high average salaries ...
  6. Interest Rate Collar

    An investment strategy that uses derivatives to hedge an investor's ...
Related Articles
  1. Investing

    Minimize Risk With The Long Collar

    Think your favorite stock is on the way down? This simple option-trading strategy can help you manage your risks without selling the stock.
  2. Investing

    Apple As An Example Of How a Protective Collar Works

    We define a protective collar, using Apple (AAPL) as an example. A protective collar is a combination of a covered call plus long put position.
  3. Trading

    Capitalize On Collars To Enhance Your Trades

    Trade collaring measures current technicals and makes swift adjustments to account for environmental changes.
  4. Insights

    Blue Collar Vs. White Collar: Different Social Classes?

    Learn about the implications of the words "blue collar" and "white collar" and the connotation each carries for social class and the type of labor performed.
  5. Investing

    Market Volatility Strategy: Collars

    Find out which protective or bullish collar will result in your optimal risk/return level.
  6. Managing Wealth

    Costless Collars: Because Asset Allocation Is Not Enough

    Collars are extremely flexible, and can be much more beneficial to your portfolio than asset allocation.
  7. Trading

    How Does a Collar Work?

    Collar refers to a protective options strategy that investors use after a stock has experienced substantial gains.
  8. Investing

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.
  9. Investing

    Diversifying A Concentrated Stock Position

    Having stocks in one area exposes an investor to risk. We tell you four ways to minimize it.
  10. Investing

    Long on Oil? Hedge Falling Oil Prices with Options

    With no end to the oil slump in sight, here are some risk management strategies using options to protect your oil positions.
RELATED FAQS
  1. How is a short call used in a collar option strategy?

    Learn how a short call is used in a collar option strategy, and see how this strategy has a limited risk and a limited return ... Read Answer >>
  2. What are the best options strategies for investing in the real estate sector?

    Discover two popular options strategies that traders often use to enhance or protect profits when investing in the real estate ... Read Answer >>
  3. Why are traders on the floor of the exchange?

    Before the advent of electronic trading platforms, the floor of the stock exchange was the location for market transactions ... Read Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Discover how the fixed charge coverage ratio is useful to investors and analysts, and when it suggests that a company should ... Read Answer >>
  5. When is it useful to look at a company's fixed asset turnover ratio?

    Understand when it is useful to look at a company's fixed asset turnover ratio, and learn which industries are best suited ... Read Answer >>
  6. What is considered to be a good fixed asset turnover ratio?

    Learn what the fixed asset turnover ratio is, how the ratio is calculated and how the fixed asset turnover ratio can be used ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center