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A recently completed study in Canada found that collars, which are used to stabilize a bidder's stock acquisition currency, have been used in approximately 2% of takeover bids for public companies over the past three years. Although the number of deals appears low, two of the five largest mergers and acquisitions (M&A) deals of 2000 in Canada employed collars. Both Vivendi's C$41.6 billion ($26.1 billion) acquisition of Seagram and Shire Pharmaceuticals Group's C$5.9 billion acquisition of BioChem Pharma utilized collar structures to increase certainty for their transactions.

The study also found that cross-border and international M&A accounts for almost 70% of collars used in Canada and that collars are more prevalent in technology and regulated industries and are non-existent in the oil and gas and natural resource sectors.

Deciding on whether to employ a price protection mechanism, such as a collar, in a share transaction will depend on a variety of factors. Generally, collars are unnecessary in mergers of equals or where there is a large bidder with a wide shareholder base and a stable share price. The study indicated, however, that collars are, for the most part, employed in larger transactions. The average deal size involving collars was approximately $3.5 billion for transactions where the target was Canadian.

The study also found that collars were more prevalent in M&A transactions where the target had one large shareholder or a large block of shareholders, presumably because a group agreeing to sell into the transaction requires a more certain value prior to close in exchange for providing lock-ups. Costs associated with deal failure may also induce a party to negotiate a collar to ensure deal certainty. Corel Corporation's outstanding bid for SoftQuad Software is an example of a collar used because the target was in a cash crunch and needed to secure a transaction that gave it the highest certainty of closing – a situation not unfamiliar to many technology companies.

A bidder deciding whether to employ a stabilizing mechanism such as a collar would be well-advised to consider the above factors before utilizing such a device.

Paul Grod

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