The Merger Consideration is the price that an acquirer pays for the target company. Calculating the profitability of the merger arbitrage spread requires the this figure to be known in all its possible forms. That is, the consideration may be made in more than one type of payment, as explained in the example below. This allows the trader to take advantage of any mispricing that may be unavailable to the average shareholder.
As Christopher K. Reedy in his 2001 academic paper “Merger Consideration Structures” explains,
One of the most important aspects of merger negotiations involves the determination of the value and structure of the merger consideration. The consideration, a price that the acquirer pays for the target company, can be composed entirely of cash or a combination of cash and securities such as subordinated promissory notes, preferred stock, or common stock.
This term is frequently cited in the merger agreement. In the case of a stock deal, it refers to the number of shares the acquirer will issue in the merger in respect to each share of the target company common stock held by a holder of record immediately prior to the effective time. A calculation which is made by multiplying by the exchange ratio formula.
Merger Consideration Example
The takeover of Artisan Components by ARM Holdings at the end of 2004 involved a filing by Artisan with the SEC illustrating and example merger consideration calculation. As there were different elections available to the target stockholder, a choice had to be made how the consideration was going to be received. In this case the options were
- Cash Election Shares Get Cash
- Cash Election Shares Get ADS
- Stock Election Shares Get ADS
- Stock Election Shares Get Cash
The target stockholder was able to make a choice that best suited their unique circumstances based on the example calculations given.
