Stock Consideration

In a stock deal, target shareholders receive a set number of acquirer shares for each share they own, based on the exchange ratio.

Stock consideration has several features. Target shareholders share in the future performance of the combined company, both gains and losses. The acquirer does not need to raise cash or take on debt. In many countries, stock-for-stock exchanges can be structured so target shareholders defer capital gains tax until they sell the new shares.

For example, an acquirer might pay for a target by issuing 30,000,000 new shares, so that target shareholders own 25% of the enlarged company.

Paying with shares dilutes the acquirer's existing shareholders and can signal that the acquirer believes its shares are fully valued, which is why share prices sometimes fall when stock deals are announced. Because the value received depends on the acquirer's share price, target shareholders face uncertainty between announcement and completion, unless protections such as collars are agreed.