Merger Deal Structures and Investment Strategies

Abstract

The target and bidding firms' return patterns during merger and acquisition attempt periods have been researched by many. This article explores how the target shareholder wealth protection which collar offers provide is related to the performance of merger arbitrage positions. More specifically, the authors seek to test how the collar offer deal components which are designed to protect the wealth of the target firm's shareholders relate to both merger arbitrage performance and the probability of success for the takeover effort. The results show that the level of wealth protection relates consistently and positively to the profitability of merger arbitrage and the probability of merger completion, thereby supporting the protection argument made by the authors. The results also show that the decision to use a fixed payment (fixed dollar amount) collar offer rather than a fixed exchange (variable dollar value exchange ratio) collar offer is positively related to the correlation between the target and acquiring firms' stock prices and the growth potential of the target firm. These findings may be of use to both merger arbitragers and those involved in the formulation of takeover offers.