Exchange Ratio

In a fixed exchange ratio, the number of acquirer shares per target share is locked at signing and does not change regardless of stock price movements before closing. This means the effective dollar value of the deal fluctuates with the acquirer's stock price — if the acquirer's stock drops 10%, the target shareholders receive 10% less value. In a floating (or fixed-value) exchange ratio, the dollar value per target share is fixed, and the number of acquirer shares adjusts based on the acquirer's stock price at closing. Fixed ratios are more common because they preserve the pro forma ownership split, which is the ratio negotiated in the merger model. Some deals use a collar — a fixed ratio within a band, but if the acquirer's stock moves outside the band, the ratio adjusts or the deal terms may be renegotiated.

The exchange ratio is calculated as the offer price per target share divided by the acquirer's current stock price. If the acquirer offers $50 per target share and the acquirer's stock trades at $100, the exchange ratio is 0.50x — each target shareholder receives 0.5 acquirer shares for each target share. The implied premium is then derived by comparing the offer value to the target's undisturbed trading price. In a contribution analysis, the exchange ratio is evaluated based on each company's relative contribution of revenue, EBITDA, earnings, and equity value to the combined entity. If the target contributes 30% of combined EBITDA, the target shareholders should receive approximately 30% ownership of the combined company.

The exchange ratio directly drives the accretion/dilution analysis because it determines how many new shares the acquirer issues, which affects the denominator in the combined company's earnings per share calculation. A higher exchange ratio means more dilution to existing acquirer shareholders. The pro forma ownership split is calculated as: Target Shareholders' Ownership = (Target Shares × Exchange Ratio) / (Acquirer Shares + Target Shares × Exchange Ratio). In a merger of equals, the exchange ratio is set to achieve a roughly 50/50 ownership split, though the exact ratio depends on relative market capitalizations. Bankers run extensive sensitivity analyses showing how different exchange ratios affect accretion/dilution, ownership, and implied premiums.