Warrant

What Does Warrant Mean?

A warrant is a security that gives an option to the holder to purchase a certain number of shares at a predetermined price. These are often issued with a bond or preferred stock. Warrants form a part of the mezzanine level of a firm's outstanding debt hierarchy.

Divestopedia Explains Warrant

A warrant is a security with an expiry date that entitles the holder to buy the issuring firm's underlying stock at a fixed price. It is a formal assurance. For example, if an investor puts in $1,000 and receives warrant coverage of 20%, then he gets stocks worth $200. The rate at which the stock would be offerred is specified in advance. It can be the rate at which the new round of stock is issued. Warrants have historically been viewed as neither stock nor security, but they are now treated as being at par with securities. This gives the holder the right to purchase securities from the issuer within a specific time frame at a specific price.

The choice of payment method is a key issue in mergers and acquisitions. Contingent methods of payment other than stocks can mitigate the concerns to some extent. Warrants are used to boost investor returns. Higher returns, beyond what can be achieved with interest payments alone, can be attained through appreciation of the issuing firm's equity value.

Acquiring firms prefer not to have a warrant holder acquiring equity in the acquirer. The warrant holders of the target firm can exercise their right to purchase securities within the given time frame or give up warrants. The target firms have to pay off warrant holders prior to closing while disclosing a potential merger.