Exchange Ratio

Ratio of shares traded in a merger and acquisition

What is an exchange ratio?

The exchange ratio measures the ratio of shares the acquiring company is offering the target firm for one share of the target firm. Depending on the structure of the acquisition transaction, this metric can be a very valuable one to understand.



Exchange ratio = Shares offered by Acquirer / Shares outstanding of Target


Exchange Ratio example

Assume firm A is the acquirer and firm B is the target firm. Firm B has 10,000 outstanding shares. Firm A is offering 20,000 of its shares, for which it must issue 20,000 new shares. The exchange ratio here, then is 2:1. For each share of firm B, firm A is offering 2 of its own shares.


Importance of the Exchange Ratio

In the event of a cash-only merger transaction, the exchange ratio is not a useful metric. In fact, in this situation, it would be fine to exclude the exchange ratio from analysis. Often times, M&A valuation models will note the exchange ratio as “0.000” or blank, when it comes to a full cash transaction. Alternatively, the model may display a theoretical exchange ratio, if the same value of the cash transaction were instead to be carried out by a stock transaction.

However, in the event of a 100% stock deal, the exchange ratio becomes a powerful metric. It becomes virtually essential, and allows the analyst to view the relative value of the offer between the two firms.

In the event of a split deal, where a portion of the transaction involves cash and a portion involves a stock deal, the percentage of stock involved in the transaction must be considered. Excluding any cash effects, what is the actual exchange ratio based on the stock. Additionally, M&A models may want to also show what this transaction would look like if there was a 100% stock deal.



Accounting for exchange ratios becomes more difficult when analyzing the firm’s values. This is because it involves the transfer of some value of the acquirer firm into the target firm’s owners. When an acquiring firm offers cash to the target firm, the effect is simple. The target firm is absorbed by the acquirer in exchange for cash.

However, when an acquirer offers stock in its own firm for the target firm, the valuation becomes more complex. This is because some of the value of the acquiring firm is diluted and given to the target firm. After the transaction, some of the value of the merged firm and its synergies will be owned ty the target firm. Thus, this must be taken into account when calculating the proper exchange ratio to use in an M&A transaction.


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