Collars analysis v. 3.1.

xls
Revised May 22, 2001

This model supports reader analysis and valuation of collars used in merger and
acquisition transactions. Three worksheets permit visual analysis of collar structures on
the value and number of shares paid to target shareholders. Exhibit 4 gives a table
illustrating the results of this example, the total shares issued by the buyer, and total
consideration paid. Exhibit 5 gives graphs of the value and shares paid for the stock
portion alone (Figures 5a and 5b), the collar alone (Figures 5c and 5d), and the
combination of stock and the collar (Figures 5e and 5f). The collar valuation model
must be invoked with @Risk! simulation software, or comparable software. To use the
worksheets, enter values for the assumptions indicated in blue. Please see the chapter,
"Risk Management in Mergers and Acquisitions" by Robert Bruner (Applied Mergers and
Acquisitions) for a discussion of this analysis.

Copyright © 2001 by Robert F. Bruner and the Trustees of the University of Virginia Darden School Foundation.
This spreadsheet graphs the value of the bid to target shareholders under various exchange ratio assumptions. To use the

Assumptions
Base-Case Exchange Ratio 1.5
Buyer´s stock price $ 50.00
Value Offered per share $ 75.00

Buyer´s Stock Price

$0.00 $ 25.00 $ 50.00 $ 75.00 $ 100.00
Exchange 0.50 $0.00 $ 12.50 $ 25.00 $ 37.50 $ 50.00
Ratio 1.00 $0.00 $ 25.00 $ 50.00 $ 75.00 $ 100.00
1.50 $0.00 $ 37.50 $ 75.00 $ 112.50 $ 150.00

1.50
How the Value of the Bid Varies with Buyer´s Stock Price
$160.00

$140.00

$120.00

$100.00
per Target Share
Value of the Bid

$80.00
ER=0.5
$60.00 ER=1.0
ER=1.5
$40.00

$20.00

$0.00
$0.00 $25.00 $50.00 $75.00 $100.0
0

Buyer´s Stock Price

tio assumptions. To use the model, please enter values into the blue cells.
This worksheet permits visual modeling of Fixed Exchange Ratio deals and their collars. Insert assumptions into the blue cells to observe results.

Buyer's
Stock Value of Bid Value of Value of Bid Payoff on
Price Without Collar Collar With Collar Upper Strike
"Fixed" Exchange Ratio 1.00 $ 0.01 $ 0.01 $ 14.99 $ 15.00 $ -
Collar upper strike $ 25.00 $ 5.00 $ 5.00 $ 10.00 $ 15.00 $ -
Exch. Ratio above upper strike 0.75 $ 10.00 $ 10.00 $ 5.00 $ 15.00 $ -
Collar lower strike $ 15.00 $ 15.00 $ 15.00 $ - $ 15.00 $ -
Exch Ratio below lower strike 1.50 $ 20.00 $ 20.00 $ - $ 20.00 $ -
$ 25.00 $ 25.00 $ - $ 25.00 $ -
$ 30.00 $ 30.00 $ (5.00) $ 25.00 $ (5.00)
$ 35.00 $ 35.00 $ (10.00) $ 25.00 $ (10.00)
$ 40.00 $ 40.00 $ (15.00) $ 25.00 $ (15.00)

Figure 5a: Fixed Exchange Ratio Deal: Figur

Value Received by Target Investor,
without a Collar
Value of Bid per Target Share

Buyer Shares per Target Share

1.20
$50.00
1.00
$40.00
0.80
$30.00
0.60
$20.00
0.40
$10.00
0.20
$- -
1 00 00 00 00 00 00 00 00
0 .0 . 0 . 5 . 0 . 5 . 0 . 5 . 0 . .0
1
$ $5 $1 $1 $2 $2 $3 $3 $4 $0

Buyer´s Share Price

 0.20
$-

Buyer Shares
-

Value of Bid
1 00 00 00 00 00 00 00 00
0 .0 . 0 . 5 . 0 . 5 . 0 . 5 . 0 . 01
$ $5 $1 $1 $2 $2 $3 $3 $4 $0
.

Buyer´s Share Price

Figure 5c: Fixed Exchange Ratio Deal: Figur

Value Received by Target Investor,
Due to the Collar
Value of Bid per Target Share

Buyer Shares per Target Share

2.50
$20.00 2.00
$15.00
1.50
$10.00
$5.00 1.00
$- 0.50
$(5.00) 1
. 0 . 00 . 00 .0 0
. 00 . 00 .0 0
. 00 . 00 0.00
$(10.00)
$0 $5 $10 $15 $20 $25 $30 $35 $40
$(15.00) -0.50
. 00
$(20.00) $5

Buyer´s Share Price

Figure 5e: Fixed Exchange Ratio Deal: Figu

Value Received by Target Investor,
get Share

get Share
Stock Plus Collar
3.50
$30.00
$25.00 3.00
$20.00 2.50
 Figure 5e: Fixed Exchange Ratio Deal: Figu
Value Received by Target Investor,

Value of Bid per Target Share

Buyer Shares per Target Share

Stock Plus Collar
3.50
$30.00
$25.00 3.00
$20.00 2.50
$15.00 2.00
$10.00 1.50
$5.00 1.00
$-
0.50
. 01 . 00 . 00 . 00 . 00 . 00 .00 . 00 . 00 -
$0 $5 $1
0
$1
5
$2
0
$2
5
$3
0
$3
5
$4
0 $5.0

Buyer´s Share Price

o observe results.

Payoff on Number of Buyer Shares Issued Per Target Share

Lower Strike Without Collar Stock Collar With Stock Collar
$ 14.99 1.00 1499.00 1,500.00
$ 10.00 1.00 2.00 3.00
$ 5.00 1.00 0.50 1.50
$ - 1.00 0.00 1.00
$ - 1.00 0.00 1.00
$ - 1.00 0.00 1.00
$ - 1.00 -0.17 0.83
$ - 1.00 -0.29 0.71
$ - 1.00 -0.38 0.63

Figure 5b: Fixed Exchange Ratio Deal:

Number of Shares Issued,
without a Stock Collar
Buyer Shares per Target Share

1.20
1.00
0.80
0.60
0.40
0.20
-
1 0 0 0 0 0 0 0
0.0 5.0 0.0 5.0 0.0 5.0 0.0 5.0
$ $ $1 $1 $2 $2 $3 $3

Buyer´s Share Price

 0.20

Buyer Shares
-
. 01 . 00 . 00 . 00 . 00 . 00 . 00 . 00
$0 $5 $1
0
$1
5
$2
0
$2
5
$3
0
$3
5

Buyer´s Share Price

Figure 5d: Fixed Exchange Ratio Deal:

Number of Shares Issued,
Due to the Collar
Buyer Shares per Target Share

2.50
2.00
1.50
1.00
0.50
0.00
-0.50
. 00 . 00 . 00 . 00 . 00 . 00 . 00
$5 0 5 0 5 0 5
$1 $1 $2 $2 $3 $3

Buyer´s Share Price

Figure 5f: Fixed Exchange Ratio Deal:

Number of Shares Issued,
Stock Plus Collar
get Share

3.50
3.00
2.50
 Figure 5f: Fixed Exchange Ratio Deal:
Number of Shares Issued,
Buyer Shares per Target Share Stock Plus Collar
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-
$5.00
$10.00 $15.00 $20.00 $25.00 $30.00 $35.00

Buyer´s Share Price

This worksheet permits visual modeling of Fixed Value deals and their collars. Insert assumptions into the blue cells to observe results.

Buyer's
Stock Value of Bid Value of Value of Bid Payoff on Payoff on Number of Buyer Shares Issued
Price Without Collar Collar With Collar Upper Strike Lower Strike Without Collar Lower Strike
"Fixed" Value per Target Share $ 20.00 $ 0.01 $ 20.00 $ (14.99) $ 5.01 $ - $ (14.99) 2,000.00 -1998.5
Collar upper strike $ 25.00 $ 5.00 $ 20.00 $ (10.00) $ 10.00 $ - $ (10.00) 4.00 -2.5
Exch. Ratio above upper strike 0.75 $ 10.00 $ 20.00 $ (5.00) $ 15.00 $ - $ (5.00) 2.00 -0.5
Collar lower strike $ 15.00 $ 15.00 $ 20.00 $ - $ 20.00 $ - $ - 1.33 0
Exch Ratio below lower strike 1.50 $ 20.00 $ 20.00 $ - $ 20.00 $ - $ - 1.00 0
$ 25.00 $ 20.00 $ - $ 20.00 $ - $ - 0.80 0
$ 30.00 $ 20.00 $ 3.75 $ 23.75 $ 3.75 $ - 0.67 0
$ 35.00 $ 20.00 $ 7.50 $ 27.50 $ 7.50 $ - 0.57 0

Figure 7a: Fixed Value Deal: Figure 7b: Fixed Value

Value Received by Target Investor, Number of Shares Iss

Buyer Shares per Target Share

Without a Collar Without a Collar
Value of Bid per Target Share

$25.00
$20.00 5.00
$15.00 4.00
$10.00 3.00
$5.00
$- 2.00
1.00
.0
1
. 00 .0
0
.0
0
.0
0
.0
0
. 00 . 00
$ 0 $5 1 0 1 5 2 0 2 5 30 35 -
$ $ $ $ $ $ $5.00 $10.00 $15.00 $20.00 $2

Buyer´s Share Price Buyer´s Share Pr

Collar valuation model

Explanatory note: This model uses Monte Carlo simulation with the add-in software, @Risk!, to estimate the value
supposes that any collar is composed of at least two, and at most four, embedded options (either a long call, short
put). To use this model, please insert assumptions in the cells indicated by blue lettering. Key simulation results a
lettering. Also, check that the calculations in cells F17, F21, F25, and F29, correspond exactly to the collar you are
invoke the simulation software, run it, and interpret the results.

Important note: this calculation is from the standpoint of the target firm's shareholder.

Life of the collar:

Expected days 180
Maximum days 360
Minimum days 90
Forecast of life of collar: #ADDIN?
Structure of the collar:
If one component is a long call:
Strike price: $ -
Payoff formula (text): Maximum of (stock price minus strike price) o
Payoff calculated: 0
If one component is a short call:
Strike price: $ -
Payoff formula (text): Zero minus the maximum of (stock price minu
Payoff calculated: $ -
If one component is a long put:
Strike price: $ 57.00
Payoff formula (text): Maximum of (strike price minus stock price) o
Payoff calculated: #ADDIN?
If one component is a short put:
Strike price: $ 48.50
Payoff formula (text): Zero minus the maximum of (strike price min
Payoff calculated: #ADDIN?
Buyer's share price today: $ 57.00
Annualized volatility of buyer's share price: 25%
Standard deviation of buyer's share price over the expected life #ADDIN?
Forecast of buyer's share price at closing of deal: #ADDIN?
Risk-free rate of return today 5%
Annualized volatility of risk-free rate of return 15%
Standard deviation of annualized risk-free rate of return 0.8%
Forecast of risk-free rate of return: #ADDIN?

Calculated value of the collar (sum of four payoffs): #ADDIN?

ware, @Risk!, to estimate the value of a collar. It
ed options (either a long call, short call, long put, or short
lettering. Key simulation results are indicated by red
espond exactly to the collar you are valuing. Then

of (stock price minus strike price) or zero

us the maximum of (stock price minus strike price) or zero

of (strike price minus stock price) or zero

us the maximum of (strike price minus stock price) or zero