Given heightened market uncertainty, volatility in share prices, a cloudy outlook it is now important to hedge time period to closing risk in M&A deals. We recommend that a collar around announced deals is especially useful.
If acquiror share prices fall or rise beyond a certain point, the transaction switches to a floating exchange ratio. Collar establishes the minimum and maximum prices that will be paid per target share. Above the maximum target price level, increases in the acquiror share price will result in a decreasing exchange ratio (fewer acquiror shares issued). Below the minimum target price level, decreases in the acquiror share price will result in an increasing exchange ratio (more acquiror shares issued).