A Contingent Value Right (CVR) is a contract that is given to target shareholders when certain element(s) of the target are difficult to value. Because it is difficult to value these parts of the business, having such Boolean outcomes means the price offered by the acquirer in a takeover is difficult to compute. A CVR helps reduce to risk of incorrect valuation by offering a contract, which pays out if certain criteria, are fulfilled.
It is important to note in respect of CVR’s how they may be taxed. Although they may be difficult to value at inception, it is likely the IRS will a basis at the effective date. Traders are advised to seek professional advice in this regard and make the appropriate adjustments when calculating the profitability of a trade based on their own unique circumstances. A search of the IRS website for “Contingent Value Right” or “CVR” however does not produce any meaningful results.
Further CVR Usage
CVR’s are similar to call options or warrants. They frequently have an expiration date, sometimes a very long expiration date depending on the nature of the contract, just as warrants do. Beyond this date, the contract expires worthless if the valuation events has not been triggered. Again, this is similar to call options that expire worthless if the underlying stock does not rise above the option strike price. For more information on using options in merger arbitrage see our article How to use Options in a Merger Arbitrage Strategy.
For more information on how a CVR is used in merger arbitrage please see our glossary entry Contingent Value Right.
