View source for Finance:Contingent value rights

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In [[Finance:Corporate finance|corporate finance]], 
'''Contingent Value Rights''' (CVR) are rights granted by an [[Social:Mergers and acquisitions|acquirer]] to a company’s shareholders, <ref>[[Investopedia]] (2020). [http://www.investopedia.com/terms/c/cvr.asp ''Contingent Value Right (CVR)'']</ref> facilitating the transaction where some uncertainty is inherent.
CVRs may be separately tradeable securities; <ref name="Fool"/>
they are occasionally acquired (or [[Finance:Short|shorted]]) by specialized hedge funds. <ref>See for example  [https://www.sec.gov/Archives/edgar/data/1518042/000158064218000407/baltermergeropp_485a.htm this] [[Finance:Prospectus|prospectus]] as filed with the SEC.</ref>

==Forms==
These rights typically take either of two forms:<ref>[[Company:Thomson Reuters|Thomson Reuters]] (2019). [http://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.26465.19.pdf ''Contingent Value Rights (CVRs)''], Practical Law series</ref>
(1) Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence protecting the acquirer against the [[Finance:Valuation risk|valuation risk]] inherent in overpaying.
(2) Price-protection CVRs are granted when [[Social:Mergers and acquisitions#Stock|payment is share based]] - protecting the acquired company, by providing  a [[Finance:Hedge|hedge]] against downside price risk in the acquirer's equity. <ref name="Chatterjee"/>

In the first case, CVRs are granted 
<ref name="Fool">Motley Fool (2018). [https://www.fool.com/investing/2018/10/19/what-is-a-contingent-value-right.aspx ''What Is a Contingent Value Right?'']</ref> 
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;
whereas on the other side, the acquired company “wants to get full value for its assets”.
The CVR then “helps bridge this negotiation”.
Under these rights, shareholders will receive additional cash, securities, or benefits if a specific and named event occurs 
- one where the value of the firm significantly increases
- within a specified timeframe. 
(see {{slink|Valuation (finance)#Valuation of intangible assets}}); 
they are also often granted to shareholders in companies facing significant,  [[Finance:Accretion|value accretive]] restructuring. 
For an example see [[Company:Media General|Media General]] / Nexstar Media Group.

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. <ref>SEC (2006). [https://www.sec.gov/Archives/edgar/data/1094961/000119312506126810/dex991.htm ''Questions and Answers For Contingent Value Rights Holders'']</ref>

==Valuation==
Under both, the CVR is in function, a form of [[Finance:Option|option]].
<ref>Jan W Dash (2004). [https://books.google.com/books?id=wGVIDQAAQBAJ ''Quantitative Finance and Risk Management: A Physicist's Approach''], World Scientific. {{ISBN|978-9812387127}}</ref>

The first case: analogous to a [[Finance:Call option|call option]], the payout to the CVR holder will be triggered by the event occurring, and will be zero otherwise.
To [[Finance:Valuation|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 [[Finance:Contingent claim valuation|Contingent claim valuation]], [[Finance:Real options valuation|Real options valuation]], and {{slink|Mergers and acquisitions#Business valuation}}.
<ref>Aswath Damodaran (ND). [http://pages.stern.nyu.edu/~adamodar/New_Home_Page/lectures/approach.html ''Valuation: Approaches & Discounted Cash Flow Models'']</ref>

The second: the CVR takes the form of a modified [[Finance:Asian option|Asian option]].<ref name="Chatterjee">Sris Chatterjee (2003). [https://ssrn.com/abstract=424903 ''Contingent Value Rights in Acquisitions: Theory and Empirical Evidence''], EFA 2003 Annual Conference Paper No. 897</ref>

==See also==
*[[Finance:Strip financing|Strip financing]]
*[[Finance:Hold-up problem|Hold-up problem]]
*[[Finance:Earnout|Earnout]]

==References==
{{reflist}}

==External links==
*[http://www.investopedia.com/terms/c/cvr.asp CVR on Investopedia]
*[https://www.fool.com/investing/2018/10/19/what-is-a-contingent-value-right.aspx CVR on Motley Fool]
*[https://www.forbes.com/sites/greatspeculations/2011/05/09/shadowy-shares-the-dark-side-of-contingent-value-rights/#425e23603343 Shadowy Shares: The Dark Side of Contingent Value Rights, Forbes.com]  (Michael Stocker, Iona Evan. 2011)

{{Corporate finance and investment banking}}
[[Category:Corporate finance]]
[[Category:Valuation (finance)]]
[[Category:Securities (finance)]]
[[Category:Equity securities]]
[[Category:Venture capital]]

{{Sourceattribution|Contingent value rights}}