Stock Swap

What is Stock Swap?

A Stock Swap is a financial arrangement where shareholders exchange their existing shares for new shares, usually during a merger, acquisition, or restructuring. Instead of getting cash, investors receive stock in the acquiring or restructured company.

Purpose

Stock swaps are mainly used to:

• Facilitate mergers and acquisitions without using cash
• Allow companies to preserve liquidity
• Align the interests of shareholders from both companies involved

**How It Works?

• In a typical stock swap during an acquisition:
• The acquiring company offers a fixed number of its own shares for every share of the target company.

Example: Company A acquires Company B and offers 2 of its own shares for every 1 share of Company B.

This ratio is called the swap ratio and is based on the valuation of both companies.

Types of Stock Swaps

1. Merger-related Stock Swaps: Used to combine two businesses
2. Executive Compensation Swaps: Employees swap their vested stock for new plans
3. Debt-to-Equity Swaps: Creditors receive company shares in exchange for debt

Importance in Corporate Finance

• Enables strategic growth through equity-based acquisitions
• Helps reduce the need for borrowed funds or large cash outflows
• Encourages shareholder continuity post-merger

Pros

• Preserves cash for the acquiring company
• May offer tax deferral for shareholders
• Keeps shareholders invested in the combined company’s future

Cons

• May dilute the value of existing shares
• Valuation disputes can arise
• Complex to calculate a fair swap ratio