Finance:Contingent value rights
In corporate finance, Contingent Value Rights (CVR) are rights granted by an acquirer to a company’s shareholders,[1][2] facilitating the transaction where some uncertainty is inherent. CVRs may be separately tradeable securities;[3] they are occasionally acquired (or shorted) by specialized hedge funds.[4]
Forms
These rights typically take either of two forms:[5] (1) Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence protecting the acquirer against the valuation risk inherent in overpaying. (2) Price-protection CVRs are granted when payment is share based - protecting the acquired company, by providing a hedge against downside price risk in the acquirer's equity.[6]
In the first case, CVRs are granted[3] in scenarios in which the acquiring company does not wish to pay for a product that might not work, has a limited market, or might need significant investment;
In the second case, protection against price risk is facilitated by specifying that payment will be made at an averaged, as opposed to final, share price; a floor may also be set.[7]
Valuation
Under both, the CVR is in function, a form of option.[8]
The first case: analogous to a call option, the payout to the CVR holder will be triggered by the event occurring, and will be zero otherwise. To determine the value of these rights, analysts will apply a modified option pricing model based on the probability of the event, the time horizon specified, and the corresponding payout rules; see Contingent claim valuation, Real options valuation, and Mergers and acquisitions § Business valuation.[9]
The second: the CVR takes the form of a modified Asian option.[6]
See also
References
- ↑ Investopedia (2020). Contingent Value Right (CVR)
- ↑ "Contingent Value Rights". https://content.next.westlaw.com/Glossary/PracticalLaw/I0fa00c25ef0811e28578f7ccc38dcbee?contextData=(sc.Default)&transitionType=Default.
- ↑ 3.0 3.1 Motley Fool (2018). What Is a Contingent Value Right?
- ↑ See for example this prospectus as filed with the SEC.
- ↑ Thomson Reuters (2019). Contingent Value Rights (CVRs), Practical Law series
- ↑ 6.0 6.1 Sris Chatterjee (2003). Contingent Value Rights in Acquisitions: Theory and Empirical Evidence, EFA 2003 Annual Conference Paper No. 897
- ↑ SEC (2006). Questions and Answers For Contingent Value Rights Holders
- ↑ Jan W Dash (2004). Quantitative Finance and Risk Management: A Physicist's Approach, World Scientific. ISBN 978-9812387127
- ↑ Aswath Damodaran (ND). Valuation: Approaches & Discounted Cash Flow Models
External links
- CVR on Investopedia
- CVR on Motley Fool
- Shadowy Shares: The Dark Side of Contingent Value Rights, Forbes.com (Michael Stocker, Iona Evan. 2011)
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