Updated on March 1, 2023
Swap ratio is used when a company which acquires another company through a merger or acquisition offers its own shares in exchange for the target company’s shares. A merger or acquisition is not necessarily an all cash purchase. It can involve stock conversion or stock exchange, which happens at a particular rate or share exchange ratio. This exchange rate or ratio is called Swap Ratio.
Why is a swap ratio important?
Swap ratio basically helps the shareholders of the target company understand the number or proportion of shares of the acquiring company’s shares they will receive for every one share of target company stock they own. Shares of the target company may no longer exist after the transaction is complete. The swap ratio is arrived at by analysing certain metrics and along with financial analysis, other strategic considerations are also factored in. A ratio so decided finalises the rate at which the target company’s shareholders will receive the acquiring company’s shares.