Exchange Ratio

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The exchange ratio is the number of the acquirer's shares that target shareholders receive for each of their shares in a merger or acquisition paid for with stock.

When an acquisition is paid for in shares, the exchange ratio determines how the combined company is split between the two sets of shareholders.

For example, if an acquirer offers 45 per target share and its own shares trade at 30, the exchange ratio is 1.5. Each target shareholder receives 1.5 acquirer shares for each share they own.

Exchange ratios can be fixed or floating. With a fixed ratio, the number of shares is set, so the value target shareholders receive changes with the acquirer's share price. With a floating ratio, the value per share is fixed, so the number of shares adjusts to deliver that value. Collars may limit how far the ratio or value can move.

The exchange ratio, together with the number of shares each side owns, determines pro forma ownership of the combined company. For example, target shareholders might end up owning 30% of the combined business. Analysts compare the implied premium with the target's recent share price to judge how generous the offer is.

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