What is the market-implied chance of closing?

The calculation assumes two values at the expected close. If the deal closes, holders get the offer. If it breaks, the shares are worth less.

Say the offer is $50.00 and the shares trade at $48.50. Assume they'd be worth $38.00 if the deal broke.

Ignoring interest, the price has covered 10.50 of the 12.00 between them: 87.5%. That's the chance of closing the price implies.

It's a calculation from market prices, not a forecast. It isn't anyone's view of whether the deal will close.

The offer

What holders get if the deal closes. In a cash deal, the cash per share.

The break price

Where the shares would trade if the deal failed. Nobody knows it, so the sum uses a stand-in, often the undisturbed price.

Interest until closing

Cash at closing is worth less than cash today. So the price is grown by what Treasury bills earn until the expected close.

Growing the price puts it on the same date as the two payouts. It uses the bill return for the time left, not the yearly rate.

With bills at a simple 4% a year and half a year to go, the price grows by 2%: (48.50 × 1.02 − 38.00) ÷ (50.00 − 38.00) = 95.6%.

A small change in the break price moves the result a lot.

Take a break price of $34.00 instead, ignoring interest. Then (48.50 − 34.00) ÷ (50.00 − 34.00) = 90.6%. A break price of $42.00 gives 81.3%.

After a failure, shares can settle above or below their price before the deal.

A study covered 236 failed US bids for public companies from 1980 to 2008. Targets of all-cash bids kept an average gain of about 15% after market moves. That gain runs from 25 trading days before the bid to 25 trading days after the failure. Targets of all-stock bids kept no clear gain.

If the shares would settle above the stand-in, the implied chance is lower than the calculation shows. If they would settle below it, it's higher.

It treats the deal as two outcomes. A higher bid, a price cut, a delay and dividends are left out. So are trading costs.

Investors usually want more than the bill rate for holding a deal that can fail. So the result is the chance at which the expected payout equals the price grown at the bill rate. It isn't the chance the market expects.

Most deals close. Of 2,182 US deals for publicly traded targets that closed or failed from 1990 to 2007, 92% closed. A rate across many deals doesn't give the chance for any one deal.

It shows how the market prices the deal on one day. It moves with the share price, the break price chosen and interest rates.

It doesn't say which way the deal will go.

r is the simple return at the 3-month T-bill rate from the delayed close's date to the expected close. The break price is the undisturbed price. Without a bill rate or an expected close it is the plain (price − break price) ÷ (offer − break price), and says so.

The Implied chance column and the deal page show it. It is always labelled as a calculation from market prices, never as our view of whether the deal closes.