In a merger agreement with a fixed exchange ratio and a collar structure, the acquirer agrees to deliver 0.5 shares for each target share if the acquirer’s average share price remains between $40 and $50. If the price falls below $40, the exchange ratio is increased. If it rises above $50, the ratio is decreased. What is the main risk to target shareholders if the acquirer’s stock falls sharply below $40 per share before closing?

1. ATarget shareholders will receive less overall value due to a reduced exchange ratio.
2. BTarget shareholders may receive more acquirer shares, but the total value could still be lower than initially expected.✓ Correct answer
3. CTarget shareholders are locked into the original ratio regardless of price movements.
4. DThe transaction will automatically terminate if the acquirer's stock falls below $40.

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