Share Swap Ratio

The share swap ratio is important to understand in finance. In this article, we will talk about the same. The swap ratio in corporate finance is referred to as the exchange rate of the company's share, which undergoes a merger as well.

Swap Ratio full form

The ratio on which the acquiring company offers their shares in exchange for the target company’s shares in the process of acquisition or merger is referred to as the swap ratio. When a company acquires another company or when a company merges, cash does not have to be the transaction to purchase the shares of a target company. This is so because it can also include a stock conversion. A swap ratio full form can tell the target company’s shareholders about the number of shares that they will receive after acquiring the stock of the company. For instance, if the acquiring company is offering a swap ratio of 3:1, then it will offer its 3 shares to every one of the target company’s shares. Because of this, the target company’s shareholders will end up having more shares than before. However, the new shares they will have will be for the company acquisition and will also have the acquiring company’s price.

About Share Swap Ratio

As of now around seven of ten banks in the public sector have been slated for a merger. They have themselves invited independent experts to know the share swap ratio of them. A share swap ratio is determined by doing a valuation of the target company, once the metrics like profits, revenues, and market price are looked into. If the company that is the target company is listed, then its share market value is usually a major consideration. Many aspects involved in the acquisitions and mergers transactions are brought into light with the help of the swap ratio. For instance,

It shows the strength and size of the companies involved. Usually, one share of the acquiring company is exchanged for more shares of the target company, which gives the target company a chance to become stronger and bigger.

It also helps in determining the control of shareholders in the combined company. Usually, the acquiring company has more control over the firm if there is a high swap ratio.

Share swap ratio formula: calculation and how it works

In order to calculate the swap ratio, there are certain financial ratios of the companies that are analysed in the share swap ratio formula. This includes profits after tax, earnings per share, book value, and other factors like company size, strategic reasons for acquisition or merger, and long-term debts. The share market value is considered a key factor when the target company is listed.

For instance, if company X is acquiring Z company, and there is a swap ratio offered of 1:5, then it will give one share of their company (X) for every 5 shares of the Z company that is being acquired.

Objectives of share swap ratio

The share swap ratio has the objective of improving investor sentiment. This is so because, in a share swap ratio, the hammering out of the government for the merging of three banks in the public sector will lead to improving the investor sentiment.

Benefits of Share Swap

The following are some of the benefits of share swap:

The risks and benefits are shared. In the target company, the shareholders will be the shareholders of the merged company also, and as a result the benefits and risks will be shared by both the entities. If in case, a cash transaction is involved, then the acquiring company shareholders will alone be responsible for bearing this fallout. Since there will be wider distribution and reach the network, there will be a flow of benefit as the distribution cost will reduce for services and products.

During a share swap, a cash outgo is not involved for the acquirer. This also saves borrowing costs. Also, the acquirer company can also put their cash for buyouts of others or as an investment in the business.