Merger

With a merger operation between two or more companies, the merged companies cease to exist and converge into one merging company, which may already exist or be newly established. As a result of the merger, the shareholders of the companies involved hand in the shares they hold and receive shares of the merging company according to the exchange ratio approved by the company.

Let us assume, for example, that the companies "A" and "B" merge, with "B" merging into "A", and the exchange ratio is 1 share of "A" every 3 shares of "B". All the "B" shareholders hand in the shares held and receive 1 share of company "A" for every 3 shares of the company "B" handed in. As a result the operations only "A" will survive, the company that merged "B".

When the shares involved in a merger also underlie derivative instruments, stock options and stock futures, these are adjusted to take into account the effect of the corporate action. In this case, both the strike prices (daily closing prices) and the lot size of the contracts are modified according to the exchange ratio of the merger operation.

In case of a merger operation where the merged company is underlying of derivatives contracts, Borsa Italiana defines the adjustment method taking into consideration the type of shares changed or transferred.
In particular:

1. if the shares changed or transferred are NOT included in the Mibtel index, stock option and/or future contracts will be closed on the basis of the Theoretical Fair Value (TFV)
2. otherwise, the security to be delivered will be substituted in accordance with principles of financial equivalence

With reference to the first case, see “Delisting of contracts” section where the methodology and rules applied to calculate the Theoretical Fair Value (TFV) are described. As regards the second case, Borsa Italiana applies the exchange ratio indicated by the merging company according to formula 5, rounded up to the sixth decimal digit. Consequently, stock option contracts (stock future) subject to a merger will see a change in their strike prices (daily closing prices) and lot size.

Formula 5.

 1
K = ---------------------
     Exchange ratio

Impact on derivatives contracts (second case)

Adjustment of the exercise price (daily closing price):

E_ex = E_cum x K

where:

• E_cum = exercise price (daily closing price) before the adjustment
• E_ex = exercise price (daily closing price) after the adjustment

Adjustment of the number of underlying shares (lot):

                  1  
A_ex = lot x -----
                   K  

where:

• A_ex = number of underlying shares after the adjustment

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Example

Merger of TIM in Telecom, official notice n. 8341 of 06/24/2005

Merger of TIM S.p.A. into Telecom Italia S.p.A.

Exchange ratio following the merger: 1.73 new Telecom Italia S.p.A. ordinary shares for each old TIM S.p.A. ordinary share.

Adjustment on stock options

With reference to the stock option contracts on TIM S.p.A. ordinary shares, the adjustment will affect both the strike price as well as the number of shares underlying the stock option contracts.

This intervention will be on the basis of the adjustment coefficient K in the following manner:

1                         1
K = ------------------------ = ------- = 0.578035
     Exchange ratio             1.73            

Adjustment of strike prices

E_ex = E_cum x 0.578035

where:

• E_cum = strike price before the adjustment
• E_ex = strike price after the adjustment

Adjustment of the number of shares underlying the stock option contract (lot)

A_ex = 1,000 x 1.73= 1,730

where:

• A_ex = number of shares (lot) after the adjustment

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