Exchange ratio
Also known as: Share-for-share ratio, Merger ratio
How many buyer's shares each target share becomes. In a share deal it is the only number, and it is about relative value.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
When one company buys another with cash, the price is a number and everybody knows what it means. When it pays in its own shares, the price is a ratio: for every share you own in the target, you receive this many shares in the buyer.
That ratio is the whole negotiation. It says how the combined company is divided between the two sets of shareholders, and nothing else in a share deal matters as much.
The important thing about it is that it fixes relative value, not absolute value. If both companies fall by a fifth before the deal closes, the ratio is unchanged and everybody owns the same proportions of a smaller thing. Only the relationship between the two is settled.
Which means the target's shareholders are still exposed to the buyer's share price right up to closing. If the buyer's shares fall, what they receive is worth less — and there is nothing in a fixed ratio to protect them.
- 1
Relative market values1–2 days
The two share prices over a period, which is where every negotiation starts.
- 2
Relative contribution3–6 days
What each side brings in earnings, cash flow and assets, compared with what it would own.
- 3
Adjustments2–4 days
Different leverage, pensions, disposals in progress — anything the market price does not yet reflect.
- 4
Negotiation1–4 wks
A ratio is agreed, and the premium implied by it is what the announcement will be read on.
Which period — Both sides decides. Averaging over a longer window flatters whichever side has fallen recently, so the choice of period is itself negotiated.
Fixed or floating — The two boards decides. A fixed ratio leaves both sides exposed to the buyer's share price until closing, and a collar is what limits that.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| Both boards | Both | Agree one number that decides how the combined company is divided. |
| Both sets of advisers | Both | Build the same analysis from different starting points and argue about the period. |
| Both sets of shareholders | Both | Vote on the result, and the side whose shares rose least is the difficult vote. |
| Arbitrage funds | Neither | Trade the ratio directly, buying one side and shorting the other, which is why the spread is readable. |
- Desk
- Valuation & Deal Analysis
- Fixes
- Relative value, not absolute value
- Fixed ratio means
- Both sides ride the buyer's share price until closing
- A collar
- Limits that exposure, in one or both directions
- Negotiated as hard as the ratio
- Which averaging period to use
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricedecides it
- Financingbarely applies
- Approvalmatters
- Diligencebarely applies
- Executionmatters
What decides it here. There is one number and both sides know exactly what moving it does, so the negotiation is entirely about relative value — including which averaging period to use, because that choice alone favours whichever side has fallen recently.
3 · IntermediateHow it runs in practice
Where the ratio comes from
- Relative market values over a period — the starting point of every negotiation.
- Relative contribution — what each side brings in earnings, cash flow, assets and net debt, compared with what it would own afterwards. This is the analysis that makes the argument.
- Adjustments for things the market prices have not caught up with: a disposal in progress, a pension deficit, different leverage.
- The premium the two boards agree the target's shareholders should receive, which may be nothing in a merger of equals.
The averaging period is itself negotiated
Using yesterday's prices, a one-month average or a three-month average produces different ratios, and each side prefers the window that flatters it. Whichever side has fallen recently wants a longer average. That choice is argued over as hard as the ratio itself, and it is disclosed in the announcement.
Fixed or floating
- A fixed ratio — a set number of shares. Certainty about ownership, uncertainty about value.
- A floating ratio — a fixed value delivered in however many shares that takes. Certainty about value, uncertainty about ownership and dilution.
A collar
A compromise: the ratio is fixed within a band of the buyer's share price and adjusts outside it. It caps each side's exposure to the other's price moving too far, and it introduces a discontinuity that arbitrage funds trade around the edges of.
4 · AdvancedThe numbers & the documents
What the announcement premium actually is
Multiply the ratio by the buyer's share price on the last day before announcement, compare with the target's share price on the same day, and the difference is the implied premium. It changes every day afterwards, because it depends on the buyer's price — which is why a share deal's headline premium is a statement about one moment.
A target whose shareholders were promised a large premium can find, months later, that the buyer's shares have fallen and the premium has gone. Nothing about the agreement changed.
The arbitrage, and the mechanical selling it creates
Funds trade the ratio directly: buy the target, short the buyer in the ratio's proportion, and capture the spread if the deal completes. That short selling is mechanical, arrives at announcement, and is a large part of why an acquirer's shares fall on the day — it is unrelated to any view about the deal.
The spread between the target's price and the ratio-implied value is readable every day and is the market's estimate of completion, exactly as it is in a cash deal — see the recommended offer.
Contribution analysis, done properly
The most useful check on any ratio: express each side's contribution to combined revenue, earnings and cash flow as a percentage, and compare with the ownership the ratio gives it. A company contributing 40% of the earnings and receiving 32% of the shares is being told something, and the difference should be explained by growth, by net debt or by synergies rather than left implicit.
It is also the analysis a dissenting shareholder will do first, so it is worth doing before the announcement rather than after.
Why the governance travels with it
In a merger of equals the ratio and the board composition are agreed together and traded off against each other. A side that concedes on the ratio frequently gains on the chief executive, and the two negotiations are one negotiation with two currencies.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Exchange ratio in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyMerger of equalsDealTwo comparable companies combining without one buying the other
- EasyRecommended offerDealA listed company bought with its own board's blessing — then a year of waiting for people outside the room
- MediumMaDeskHow a takeover actually works: the auction, the offer, the vote, the regulator and the long stop date — plus what…