Evaluating M&A Deals: Floors, Caps, and Collars

Carliss Y. Baldwin

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Background Note | HBS Case Collection | March 2009

Evaluating M&A Deals: Floors, Caps, and Collars

by Carliss Y. Baldwin

Abstract

As equity consideration has become more popular in acquisitions, so has the use of the "pricing-protection" mechanisms, such as floors, caps, and collars. These contractual devices provide insurance to the shareholders of the target and may protect the buyer as well. The purpose of this note is to define the main categories of price protection and explain their impact on the payoffs and value of the deal to the target's shareholders.

Keywords: Mergers and Acquisitions; Equity; Price; Contracts; Business and Shareholder Relations;

Format: Print

8 pages

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Citation:

Baldwin, Carliss Y. "Evaluating M&A Deals: Floors, Caps, and Collars." Harvard Business School Background Note 209-138, March 2009.

About the Author

Carliss Y. Baldwin

William L. White Professor of Business Administration, Emerita

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Case | HBS Case Collection | November 2019

Apple, Einhorn, and iPrefs (Abridged)

Carliss Y. Baldwin and W. Carl Kester

In March 2013, Apple Computer has a very large cash balance, and is under pressure to return cash to shareholders. Hedge fund manager David Einhorn thinks Apple can "unlock value" by issuing perpetual preferred stock, dubbed iPrefs. Henry Blodget, CEO of Business Insider, disagrees, saying "you can't just wave your magic wand and make something of nothing." This short case is designed to support a discussion of "perfect" markets and the Modigliani-Miller capital structure irrelevance propositions. The case focuses on two questions: (1) From a shareholder's perspective, how is Apple's cash different from cash in a bank or money market account? (2) Can Apple create significant value for shareholders by splitting each common share into an iPref plus a common share?

Keywords: markets; Stock Shares; Value Creation; Business and Shareholder Relations;

Citation:
Baldwin, Carliss Y., and W. Carl Kester. "Apple, Einhorn, and iPrefs (Abridged)." Harvard Business School Case 220-043, November 2019. View Details

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Working Paper | HBS Working Paper Series | 2019

Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 16 Capturing Value by Controlling Bottlenecks in Open Platform Systems

Carliss Y. Baldwin

The purpose of this chapter is to investigate the means by which firms capture value in open platform systems. I begin by arguing that the surplus value created by complementarities within a technical system will be split among the owners of the unique and essential components—the strategic bottlenecks in the system. However, most platforms must also execute a series of steps that are subject to “flow production” bottlenecks. Finding and fixing these flow bottlenecks is another way to capture value. In addition, two types of platform improvements provide further opportunities for value capture. “Accelerators” speed up the processing of options, while “subsidiary” platforms increase the range of options available to users. Finally, members of a platform system or new entrants may seek to supplant the owner of a strategic bottleneck by “disintermediating” platform components. I describe four generic methods of disintermediation: substitution, reverse engineering, platform independent complements, and platform envelopment.

Keywords: open platforms; bottlenecks; flow production; Value Capture; disintermediation; Production; Management;

Citation:
Baldwin, Carliss Y. "Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 16 Capturing Value by Controlling Bottlenecks in Open Platform Systems." Harvard Business School Working Paper, No. 20-054, November 2019. View Details

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Working Paper | HBS Working Paper Series | 2019

Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 17 The Wintel Standards-based Platform

Carliss Y. Baldwin

The purpose of this chapter is to use the theory of bottlenecks laid out in previous chapters to better understand the dynamics of an open standards-based platform. I describe how the Wintel platform evolved from 1990 through 2000 under joint sponsorship of Intel and Microsoft. I first describe a series of technical bottlenecks that arose in the early 1990s concerning the “bus architecture” of IBM-compatible PCs. Intel’s management of buses demonstrates how, under conditions of distributed supermodular complementarity, a platform sponsor can reconfigure the modular structure of a technical system, property rights within the system, and its own zone of authority to increase system-wide throughput, while protecting its own strategic bottleneck from disintermediation. I go on to describe how Microsoft used platform envelopment to establish a second strategic bottleneck in productivity software and later to respond to the threat of disintermediation from platform-independent internet browsers. I end the chapter by discussing the conditions under which shared platform sponsorship can be a long-term dynamic equilibrium.

Keywords: open platforms; bottlenecks; Wintel platform; disintermediation; Hardware; Software; Business History; Computer Industry;

Citation:
Baldwin, Carliss Y. "Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 17 The Wintel Standards-based Platform." Harvard Business School Working Paper, No. 20-055, November 2019. View Details

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Evaluating M&A Deals: Floors, Caps, and Collars

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