Replies to post #171755 on Biotech Values

[DewDiligence]

In an all-stock merger, the exercise price and the share count of each option in the acquired company are adjusted by applying the exchange ratio of the merger. The expiration date remains unchanged absent an explicit provision in the merger to change it (i.e. if some senior executives from the acquired company are being retained).

[biomaven0]

>>how the option strike prices change in an all-stock deal

Both the strike price and the number of options get adjusted in the same ratio based on the same conversion ratio as common shareholders are getting.

For an employee holding an option that is in-the-money, they would have the same intrinsic value immediately before the deal as after the deal (assuming the stock just prior to the close was trading without a discount to the deal price).

Basically this is the same process that happens if you own traded options in a company being acquired for stock. In the latter case there can sometimes be subtleties though - one example I recall well from some years ago was when shareholders had the right to choose either stock or cash in the deal - the default was cash, and the stock subsequently traded above the cash value. I held some LEAPS in the company being acquired (I think it was Ivax being acquired by Teva). Unfortunately it turned out that the option holder had no right to make the election - only stockholders could make the election. So basically my time value disappeared as option holders were basically cashed out. (For a short while I thought the LEAPS were being mispriced and actually bought some more until I finally figured out the deviousness of the "election" ploy. I did learn a lesson that if an option in a deal appears to be mispriced you are most likely missing something in the fine print.)

Peter