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Incorporate finance, astock swap is the exchange of one equity-based asset for another, where, during themerger or acquisition, the swap provides an opportunity topay with stock rather than with cash; seeMergers and acquisitions § Stock.
The acquiring company essentially uses its own stock as cash to purchase the business. Eachshareholder of the acquired company will receive a predetermined number of shares from the acquiring company.
Before the swap occurs each party must accurately value their company so that a fair "swap ratio" can be calculated. Thevaluation of a company is complicated in general; here though, additional tofair market value, theinvestment- andintrinsic value are to be determined as well.
After the valuation is complete, the parties will agree upon the swap ratio; this will determine the number of shares that each shareholder will receive. In theory, a fair ratio is such that shareholders in both previous companies now own a pro-rated share of the new company: value-wise or reearnings per share. The acquiring company may also need to add an extra incentive in the form of shares to ensure that theboard of directors of the acquired company approve the takeover. InSouth Korea, the merger ratio is defined by a certain formula according to the law, if both companies are listed on theKRX.
When this swap is realised, the shareholders receive the new stock and own a share in the new company. Sometimes, a part of the agreement will not allow the new shareholders to sell for a certain time period to avoid a sudden drop in share price. This is a form of ashareholder rights plan orpoison pill strategy that is used to combathostile takeovers. When all things come together and are fair, then the takeover will proceed without incident.
Stock swaps can also happen internally within a company.Starbucks has used this strategy in the past. When the stock options they offered to their employees dropped so low in price that they became virtually worthless, Starbucks offered a swap option. The company allowed the employees to swap their worthless shares for more that had a higher value.[1][2][3]
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