Thursday, June 10, 2010
There's a healthy interest in contingent value rights (CVRs) as acquisition currency. Chatterjee and Yan have a good paper on the use of CVRs in acquisitions, Innovative Securities under Asymmetric Information. In general, CVRs are essentially a credible signalling device intended to back up statements by a buyer using its stock as an acquisition currency that its stock is not overpriced and that if it turns out to be over valued the buyer will, in effect, make the seller whole through the CVRs. It's like the opposite of an earnout - where the seller is deferring payment and making it contingent upon the buyer receiving information about the true valuation of the seller.
The CVR is an elegant way to bridge a valuation gap when the buyer is using stock. Anyway, it turns out not to be so much of a big a deal. Why? Well, of the 1,744 transactions in the SDC database since 2007 where stock is the acquisition currency only 6 (0.3%) have included an offer of a CVR. Given the volatility in the marketplace during the past few years, I'd have thought that sellers taking stock would have asked for more assurances.