A company undergoing reorganization or acquired by a second company may offer the existing shareholders of the target company contingent value rights, commonly referred to as CVR. These rights are an additional benefit that the existing shareholders will receive if a particular set of circumstances materializes. The CVR may be based on performance or a specific event. For example, one business line or subsidiary must meet target performance goals for shareholders to cash in on the CVR. Contingent value rights in a company's stock generally revolve around price performance.
The value of contingent value rights may depend on the future performance of a particular stock, and may work similarly to put options, where the investor holds contractual rights, but is not required, to sell specific securities at a certain price within a set time. Just as the New York Stock Exchange Listed Company Manual calls contingent value rights "unsecured obligations," shareholders have no guarantee that the reward offered will materialize when based on a particular stock price. In addition, contingent value rights expire. If the specified set of events does not take place within the allotted time, the shareholders with the CVR in the stock receive nothing extra.
Suppose the XYZ Corporation acquires the International Gadget Company, and the price of Gadget Co.'s stock is $10 per share at the time of acquisition. The buyer of the company, which is the XYZ Corp., issues the contingent value rights in the stock to the shareholders of the acquired company, who are the sellers of the Gadget Co. The rights specify that should the share price of the stock fall below $8 within the coming 12 months, the company will award a specified cash payment to the shareholders of the Gadget stock. If this event does not occur within the allotted time frame, the contingent value rights expire.
Option to Buy
Another way contingent value rights work is for the shareholders of the acquired company to have an option to obtain additional stock shares in the company if a predetermined price target is not met during the set time of the CVR. Since stock prices cannot be predicted for certain, the price target may be met, and the CVR becomes meaningless to the investors.
In reality, at the time of issue, the actual values of CVRs are uncertain. Based solely on future expectations of stock prices or some other unpredictable event, the risk to the investor is unknown. When contingent value rights become part of mergers and acquisitions, essentially much of the risk to the acquirer is transferred to the shareholders of the target company, while allowing the buyer to put forth a more attractive offer.
- Forbes: Shadowy Shares The Dark Side of Contingent Value Rights
- NYU Stern School of Business: An Introduction to Valuation
- Sullivan & Cromwell LLP: Contingent Value Rights—Means to an End: Using CVRs to Bridge Valuation Gaps in Public Company M&A Deals
- The New York Times: Sanofi-Genzyme Deals Raises Contingent Rights Questions
- business charts with buy image by Andrew Brown from Fotolia.com