Definition
Contingent Value Rights (CVR) are financial instruments that are commonly used in business transactions, such as mergers or acquisitions. They provide holders the potential to receive benefits if a certain event occurs in the future. The event is often tied to a specific financial or operational metric, such as sales or revenue targets.
Phonetic
The phonetic pronunciation of “Contingent Value Rights (CVR)” is:Contingent: /kənˈtinjənt/Value: /ˈvalyo͞o/Rights: /rīts/CVR: /ˌsiː ˈviː ˈɑːr/
Key Takeaways
- Definition: Contingent Value Rights (CVR) are financial agreements that are linked to certain performances or achievements of a company. They are often used in mergers and acquisitions, where the shareholders of the acquired company receive additional benefits if specified future events or milestones are reached.
- Benefits: CVRs provide a degree of protection to shareholders by potentially increasing the overall value they receive from a transaction, particularly if the future performance of an acquired business is uncertain. CVRs can be appealing to shareholders because they offer the chance of additional future payout.
- Risks: Yet, CVRs also come with certain risks. The future benefits to shareholders are contingent on specified events or performances, which may not occur. This makes CVRs a more speculative investment. Furthermore, CVRs are usually not tradable on the open market, making them less liquid and harder to value.
Importance
The business/finance term Contingent Value Rights (CVR) is important because it offers a security to investors during mergers or acquisitions. When a company is acquired or merged, its existing shareholders may have a concern about the complete or fair valuation of their shares. This is where CVR comes into the picture. It guarantees the shareholders that they will receive an additional benefit if a specific future event or milestone occurs, such as the completion of a project, achievement of certain sales targets, regulatory approvals, or the realization of certain assets. This not only provides financial protection to the shareholders, but also instills confidence in them about the deal, thereby making the merger or acquisition process smoother.
Explanation
Contingent Value Rights (CVR) serve as an integral tool within the financial and business realm, specifically, regarding mergers and acquisitions. CVRs are typically used to bridge a valuation gap between the acquiring company and the target company where there is considerable uncertainty about future financial outcomes. They offer a form of insurance — a protection to the acquiring company by not overpaying for the target company and making sure the purchased company achieves its predicted financial forecasts. Furthermore, CVRs assist sellers by ensuring that they do not undersell their company and could receive additional compensation if their company performs well after being sold.In essence, a CVR is a financial agreement in which extra payments could possibly be made to the selling party if the acquired company meets certain performance goals after the sale. These performance goals may include sales targets, regulatory approvals, or other operational measures. This structure optimizes the negotiating process, and adds a level of adaptability to the uncertain future performance, making the M&A deal more appealing and fair for both parties involved. In this sense, CVRs can mitigate risk, facilitate complex transactions, and potentially enhance the value realized from an acquisition or merger.
Examples
1. **Sanofi and Genzyme Agreement:** In 2011, Sanofi and Genzyme Corporation entered into a merger agreement which included a Contingent Value Right (CVR) structure. Sanofi acquired Genzyme for $20.1 billion, along with offering CVRs to Genzyme shareholders. The CVRs were linked to the future performance of Genzyme’s experimental drug for Multiple Sclerosis, Lemtrada. Depending on certain milestones reached by the drug, Genzyme shareholders would receive additional payment, making the deal potentially worth more.2. **Celgene and Juno Therapeutics instance:** In 2018, biotech giant Celgene acquired Juno Therapeutics for $9 billion. As part of the deal, Celgene provided Juno’s shareholders with Contingent Value Rights. These CVRs were linked to the regulatory milestones and sales of JCAR017, a therapy for non-Hodgkin lymphoma. If the therapy received regulatory approval within a certain timeline and reached certain sales targets, Juno shareholders would receive an additional return.3. **Valeant Pharmaceuticals and Sprout Agreement:** In 2015, Valeant Pharmaceuticals acquired Sprout Pharmaceuticals for $1 billion. As part of the deal, Sprout’s shareholders were also granted Contingent Value Rights which were tied to the commercial success of a newly FDA-approved drug, Addyi, also known as the “female Viagra.” Sales targets set for this drug determined the additional payment Sprout’s shareholders would receive. These are all examples of how Contingent Value Rights have been used during mergers and acquisitions to give shareholders a potential boost in payout based on the performance of certain products or events in the future.
Frequently Asked Questions(FAQ)
What are Contingent Value Rights (CVR)?
Contingent Value Rights, also known as CVRs, are financial instruments that are often issued during a merger or acquisition. They represent the right to receive an additional benefit, which is contingent on certain future events or milestones being met.
When are Contingent Value Rights typically used?
CVRs are often used in business scenarios like mergers and acquisitions, particularly when there is uncertainty about certain aspects of the company being bought. For instance, a CVR agreement may be drafted to provide the sellers additional payment if the company meets a defined income level in the future or if a product receives regulatory approval.
How do Contingent Value Rights benefit sellers in a merger?
CVRs provide sellers an opportunity to benefit from the future success of the business, giving them an ongoing interest post-acquisition. If the agreed-upon milestones are met, the sellers receive additional benefit, which mitigates some risk of selling at an undervalued price.
Are Contingent Value Rights transferrable?
This varies depending on the terms set out in the acquisition agreement. In some cases, CVRs may be transferable, while in other situations, they are not. Parties involved in a CVR agreement should familiarize themselves with these terms.
How are Contingent Value Rights valued?
CVRs can be complex to value due to their dependence on future events. Factors to consider in valuation include the probability of the contingent event occurring, the timing of the contingent event, and the magnitude of the payment if the contingent event occurs.
Can Contingent Value Rights offer any tax benefits?
Possibly. In some jurisdictions, the issuance of CVRs can potentially offer certain tax benefits. However, tax situations are highly individual and specific. It’s recommended to seek advice from a tax professional.
Related Finance Terms
- Deferred Payment
- Risk Management
- Acquisition Deal Structure
- Future Target Performance
- Merger and Acquisition (M&A)
Sources for More Information
