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Let's look at below UTX/RTN merger as an example:

https://www.fool.com/investing/2020/03/30/raytheon-united-technologies-merger-gets-green-lig.aspx

The merged companies will from that moment forward be known as Raytheon Technologies Corporation, and the stock of this new, merged entity will trade as ticker symbol "RTX" on the NYSE.

To effect the merger, each outstanding share of Raytheon Company will be converted into 2.3348 shares of Raytheon Technologies Corporation. Each outstanding share of United Technologies will simply be renamed as a share of Raytheon Technologies Corporation.

United Technologies Chairman and CEO Greg Hayes will lead the new company.

Immediately after the merger, Otis will spin off as a new NYSE-listed company under the ticker symbol "OTIS;" Carrier will similarly spin off and trade as "CARR," also on the NYSE. Each share of United Technologies that a shareholder owned on Thursday will become a separate share of Carrier and a separate 0.5 share of Otis on Friday.

I am trying to understand what the "fair price"(or more like a "reference price") of RTX should be after this complex corporate action. I understand the "fair price" here is a bit vague, but I imagine the street has to agree on some sort of pricing for various derivatives or indexes. For example, UTX is a Dow Jones constituent, so index provider has to consider the proper prices of RTX when re-balancing the index weights. Options exchange has to convert/settle the UTX options into RTX options somehow, etc, etc.

So the way I understand is, the market cap of RTX right after UTX and RTN merge, is just the sum of RTN and UTX. Then you have to subtract the market cap of CARR and OTIS. The number of shares of RTX should just be number of shares of UTX + 2.3348 * number of shares of RTN.

But then, how do you determine the "market cap" of OTIS, and CARR? There are when-issued trading for OTIS and CARR, but does the capital market really rely on the last-close of WI to determine their market caps?

Would appreciate any input.

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  • $\begingroup$ Not sure why you'd think there was a reliable way to determine fair price for a company post-merger? Absent simplistic methods like DDM or DCF, which are taught but not really used in industry, there isn't a reliable way to determine 'fair value' of a single public company let alone a combination of two. Way too many variables at play. You do consistently see an increase in the share price of the target and a drop in the acquirer leading up to the acquisition though. $\endgroup$ – Chris Apr 3 at 0:39
  • $\begingroup$ @Chris I am not looking for not a "fair value" per se, but rather a "reference price". Imagine an option on UTX expiration in August. How would the exchange handle that option? You have to convert it into RTX option somehow. How would index issuers replace UTX and RTN with RTX? They have to compute the shares based on a reference price. $\endgroup$ – Vendetta Apr 3 at 0:48
  • $\begingroup$ Specifically for how options are handled, you can check the OCC memos 46727 and 46731 $\endgroup$ – msitt Apr 3 at 15:17
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For derivatives, there usually exists some agreement between the counterparties on how to handle corporate actions. The same for exchange traded contracts. EUREX, for example, has some pieces on the treatment of corporate actions and also mergers, here:

https://www.eurexchange.com/exchange-en/products/equ/corporate-actions-procedures

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