Financing Acquisitions with Contingent Value Rights (CVR's)

10.6292/AFPF.2011.04.09

Rajneesh Sharma

Contingent value rights ； Mergers ； Acquisitions

Advances in Financial Planning and Forecasting

4期（2011 / 03 / 01）

235 - 261

英文

Under perfect capital markets the choice of type of financing of an acquisition would be irrelevant. This paper considers a particular kind of imperfection, viz., two-sided information asymmetry between the target and the acquirer, and investigates how such a problem may be mitigated by the choice of means of payment. We model the use of equity coupled with either put options or contingent value rights as a means of payment in acquisitions. We show that it is possible, under some circumstances, for acquirers to eliminate signaling costs with the use of these securities. Our model predicts that the use of CVR's and put options is better for the acquirer only if the information asymmetry relating to its value is extremely high. As such these instruments are unsuitable for publicly traded acquirers. This is substantiated by the relative few CVR issuances in context of mergers. We further model use of such securities assuming imperfect resolution of the acquirer's type at expiry. We further conduct an empirical analysis of CVRs employed in mergers.

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