Exchange Ratio
Definition
In a stock-for-stock merger, the exchange ratio is the number of acquirer shares each target shareholder receives per target share. A fixed exchange ratio locks the share count (so the deal's dollar value floats with the acquirer's stock price); a fixed value (floating) exchange ratio locks the dollar value per target share (so the number of shares issued floats).
Exchange ratio = offer price per target share ÷ acquirer share price (at signing, for a fixed ratio). Deals sometimes include a collar, which bounds the ratio or the value between agreed limits to share price risk between signing and closing.
The exchange ratio drives pro forma ownership: acquirer shares issued = target diluted shares × exchange ratio, and target holders' ownership = new shares ÷ pro forma total shares. Contribution analysis compares that ownership split to each side's contribution of earnings or EBITDA.
Why interviewers ask
Interviewers use exchange ratio questions to test stock-deal mechanics: "Who bears market risk under a fixed versus floating exchange ratio?" and "How many shares does the acquirer issue?" It also feeds directly into accretion/dilution and ownership math in paper merger cases.
Related terms
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