What is the stock exchange rate?

Definition and Example of Stock Exchange Ratio

The stock exchange ratio refers to the number of new shares that the shareholders of a new or acquired company will receive relative to the number of shares they hold in the target company. The stock exchange ratio helps ensure that every shareholder maintains a comparable value of shares after the merger or acquisition process.

How Stock Exchange Ratio Works

When two companies undergo a merger or acquisition, shareholders either receive cash for their shares or ultimately become shareholders in the acquiring company or the newly formed company. There needs to be a stock exchange ratio to determine the number of shares that each existing shareholder should receive. The exchange ratio is typically defined in the merger or acquisition agreement.

What This Means for Individual Investors

As an investor, the concept of the stock exchange ratio may be important to you if the company in which you own shares undergoes a merger or acquisition. Many companies try to ensure that shareholders receive the same relative value of ownership in the new company as they had in the previous company. However, this is not always the case.

There are different strategies for calculating the stock exchange ratio. In some cases, a fixed exchange ratio is used. In this case, as mentioned, the exchange ratio is specified in the initial merger or acquisition agreement and is not affected by changes in stock prices before closing the deal. Changes in stock prices can ultimately lead to a change in the value of the shares you receive in the new company.

A poorly calculated stock exchange ratio can harm investors in both the target company and the acquiring company. If the exchange ratio is set too high, the shareholders of the acquiring company lose the value of their stakes in the company. On the other hand, an exchange ratio that is set too low harms the shareholders of the target company.

Remember that as a shareholder, you have the right to vote on mergers and acquisitions. In the case of AT&T’s acquisition of Time Warner, Time Warner held a special meeting for shareholders where each investor had the opportunity to vote on the terms of the acquisition as defined in the agreement. If you feel that the merger or acquisition terms might be unfavorable to you as an investor, you can express your opinion at the shareholders’ meeting by voting.

Source: https://www.thebalancemoney.com/what-is-an-exchange-ratio-of-shares-5212619