Fixed-Value Offer

A fixed-value offer is a type of all-stock deal in a Mergers and Acquisitions (M&A) transaction where an acquiring company promises to pay a specific monetary value for each share of the Target Company. The twist? The payment is made using the Acquirer's own stock. Unlike a simple cash buyout, the number of shares the target's stockholders receive isn't determined when the deal is announced. Instead, the final Exchange Ratio (the number of acquirer shares given for each target share) “floats” and is calculated based on the acquirer's average stock price during a specified period just before the deal closes. This structure is designed to give the target's shareholders certainty about the dollar value they will receive. If the acquirer's stock price drops before the deal is finalized, its shareholders get more shares to make up the difference. If it rises, they get fewer. It’s a common feature in a Stock Swap that places the short-term stock price risk squarely on the shoulders of the acquirer.

The logic behind a fixed-value offer is straightforward and centers on a simple formula: Exchange Ratio = (Fixed Offer Price per Share) / (Acquirer's Average Stock Price during the Pricing Period) Let's imagine a scenario:

• Company A (the Acquirer) wants to buy Company T (the Target).
• Company A makes a fixed-value offer of $40 for each share of Company T.
• The final exchange ratio will be based on Company A's average stock price over the 10 trading days before the deal closes.

Two things could happen:

1. Scenario 1: Company A's stock does well. Its average price during the pricing period is $80 per share. The exchange ratio would be $40 / $80 = 0.5. So, for every share of Company T they own, shareholders will receive 0.5 shares of Company A.
2. Scenario 2: Company A's stock stumbles. Its average price during the pricing period falls to $50 per share. The exchange ratio would be $40 / $50 = 0.8. In this case, shareholders of T get 0.8 shares of A for each of their T shares.

In both scenarios, the shareholders of Company T receive exactly $40 in value per share at the moment the ratio is set. The acquirer, however, either conserves its shares or has to issue more, diluting the ownership of its existing shareholders.

As a shareholder in a company receiving a takeover offer, the deal's structure is just as important as the headline price. A fixed-value offer presents a unique set of trade-offs.

The primary benefit of a fixed-value offer is security. You know the exact monetary value you'll get, which helps in determining if the offer is fair compared to your own calculation of the company's Intrinsic Value. This protects you if the market sours on the acquirer between the announcement and the closing, a period that can last for months. However, this security comes at a price: you sacrifice potential upside. If the acquirer is a fantastic business and its stock soars during the waiting period, you won't benefit. The exchange ratio will simply adjust downwards, and you'll still receive the same, pre-agreed dollar value. A value investor must weigh this guaranteed floor against the potential for gains they are giving up.

Pure fixed-value offers are rare. Most are hedged with a Collar Agreement, which is a critical detail for investors to find in the merger filings. A collar sets a price range (a floor and a ceiling) for the acquirer's stock.

• Within the Collar: If the acquirer's stock price stays within this range, the deal works as a standard fixed-value offer—the exchange ratio floats.
• Below the Floor: If the stock price drops below the collar's floor, the exchange ratio becomes fixed. At this point, the deal converts into a Fixed-Exchange-Ratio Offer, and the target's shareholders start losing money as the price continues to fall. This protects the acquirer from catastrophic shareholder dilution.
• Above the Ceiling: If the stock price rises above the ceiling, the exchange ratio also becomes fixed. This allows target shareholders to participate in any further upside, a feature designed to make the deal more appealing.

The presence of a collar turns the deal into a hybrid, sharing the risk and reward between both parties once the stock price moves outside a defined band.

To put it all in perspective, here is a simple breakdown comparing the two main types of all-stock deals:

• Value per Target Share: Constant (unless a collar is breached).
• Number of Acquirer Shares Received: Variable.
• Who bears the risk of the acquirer's stock price dropping? The Acquirer (by issuing more shares).

• Value per Target Share: Variable, moving in lockstep with the acquirer's stock price.
• Number of Acquirer Shares Received: Constant.
• Who bears the risk of the acquirer's stock price dropping? The Target's Shareholders.