corporate finance Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...

, Contingent Value Rights (CVR) are

rights Rights are legal, social, or ethical principles of freedom or entitlement; that is, rights are the fundamental normative rules about what is allowed of people or owed to people according to some legal system, social convention, or ethical the ...

granted by an acquirer to a company’s

shareholders A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal ow ...

, facilitating the transaction where some uncertainty is inherent. CVRs may be separately

tradeable securities Liquid tradable securities (or LTS) is a generic phrase for a wide range of financial instruments. It often differentiates financial instruments that are easily tradable (or tradeable) as opposed to those that require the permission of the company ...

; they are occasionally acquired (or shorted) by specialized

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...

Forms

These rights typically take either of two forms: (1) Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence protecting the acquirer against the

valuation risk Valuation risk is the risk that an entity suffers a loss when trading an asset or a liability due to a difference between the accounting value and the price effectively obtained in the trade. In other words, valuation risk is the uncertainty ...

inherent in overpaying. (2) Price-protection CVRs are granted when payment is share based - protecting the acquired company, by providing a

hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoin ...

against downside

price risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...

in the acquirer's equity. In the first case, CVRs are granted 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. CVRs are very common in the

biotech Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used b ...

and

pharmaceutical industries The pharmaceutical industry discovers, develops, produces, and markets drugs or pharmaceutical drugs for use as medications to be administered to patients (or self-administered), with the aim to cure them, vaccinate them, or alleviate symptoms. ...

(see ); they are also often granted to shareholders in companies facing significant, value accretive restructuring. For an example see

Media General Media General was an American media company based in Richmond, Virginia. The company's origins can be traced back to 1887 when Richmond attorney Joseph Bryan acquired ''The Richmond Daily Times'', which later became ''The Richmond Times-Dispatch ...

Nexstar Media Group Nexstar Media Group, Inc. is an American publicly traded media company with headquarter offices in Irving, Texas; Midtown Manhattan; and Chicago, Illinois. The company is the largest television station owner in the United States, owning 197 te ...

. 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.

Valuation

Under both, the CVR is in function, a form of option. The first case: analogous to a

call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...

, the payout to the CVR holder will be triggered by the event occurring, and will be zero otherwise. To determine the value of these rights, analysts will apply a modified

option pricing In finance, a price (premium) is paid or received for purchasing or selling options. This article discusses the calculation of this premium in general. For further detail, see: for discussion of the mathematics; Financial engineering for the imple ...

model based on the probability of the event, the time horizon specified, and the corresponding payout rules; see

Contingent claim valuation In finance, a contingent claim is a derivative whose future payoff depends on the value of another “underlying” asset,Dale F. Gray, Robert C. Merton and Zvi Bodie. (2007). Contingent Claims Approach to Measuring and Managing Sovereign Credit Ri ...

and

Real options valuation Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?'' (ROV or ROA) applies option valuation techniques to capital budgeting decisions.Campbe ...

Aswath Damodaran Aswath Damodaran (born 24 September 1957), is a Professor of Finance at the Stern School of Business at New York University (Kerschner Family Chair in Finance Education), where he teaches corporate finance and equity valuation. Background Kn ...

(ND)
''Valuation: Approaches & Discounted Cash Flow Models''
/ref> The second: the CVR takes the form of a modified

Asian option An Asian option (or ''average value'' option) is a special type of option contract. For Asian options the payoff is determined by the average underlying price over some pre-set period of time. This is different from the case of the usual European op ...

.Sris Chatterjee (2003)
''Contingent Value Rights in Acquisitions: Theory and Empirical Evidence''
EFA 2003 Annual Conference Paper No. 897

References

{{reflist

External links

CVR on InvestopediaCVR on Motley FoolShadowy Shares: The Dark Side of Contingent Value Rights, Forbes.com
(Michael Stocker, Iona Evan. 2011) Corporate finance Mergers and acquisitions Valuation (finance) Securities (finance) Real options Equity securities

Forms

Valuation

See also

References

External links