Fixed Dollar Value Collar

Shirts with collars not only look spiffy, but that collar serves another purpose: it protects our neck. Whether we’ve got a scratchy scarf or an abrasive overcoat, that collar acts as a shield protecting some of our more delicate skin.

Fixed-dollar value collars serve the same purpose. When one company acquires another, a fixed-dollar value collar can be put in place to protect the neck-–er, stock value–-of the acquired (Company A) against fluctuations in the stock price of the acquirer (Company B).

Here’s how it works: Company A purchases stock with a short call position and long put position. Until those options expire, the stock is going to stay within a limited and protected value range, regardless of whether Company B’s stock drops like a stone or shoots through the roof. Specific M&A agreements will differ on the value of the stock, the quantity of stock available for purchase, and the ratio of exchange between Company A stock and Company B stock.