Stock-for-stock is a strategy that is often utilized with business acquisitions or situations where companies choose to merge. The process involves exchanging the shares of stock issued by one company involved in the merger or acquisition for the shares issued by the other company. In most cases, one company is designated as the acquiring business, and the shares issued by that company are exchanged for the stock issued by the company that is acquired.
Typically, a stock-for-stock process calls for determining the rate of exchange that will occur between the two stock offerings. Determining this rate involves assessing the current value of the shares issued by the acquired company, and comparing that value to the shares of the acquiring company. Depending on the relative values, the stock-for-stock exchange may be an even swap, with one share of the acquiring company’s stock exchanged for one share of the acquired company’s stock. If the value of the acquired company’s shares is substantially lower than the market price of the stock issued by the acquiring company, the ratio may be one share issued in exchange for two or more shares.
While this process of a stock-for-stock exchange accounts for a considerable portion of the acquisition or merger process, it is not unusual for cash or some other mode of payment to also be involved in the completion of the deal. Investors who are exchanging their shares for stock issued by the acquiring company may also receive some sort of cash settlement. Former owners of the acquired company may receive up front cash or compensation by some other payment method along with the exchange of their shares of stock for shares issued by the acquiring company. There is also the possibility that the merger or acquisition will call for buying the former owners out with cash, while exchanging shares only with the remaining investors.
It is also possible to utilize a stock-for-stock approach when it comes to issuing shares of stock to employees. With this strategy, qualified employees receive stock options in exchange for paying the option price. After the stock is held for a period designated by the employer, those mature shares can be exchanged for other options without the need to purchase those new shares. After a second holding period, employees are given back the mature shares they used to arrange the stock-for-stock exchange, effectively making it possible for anyone enrolled in the employee stock option to own all the shares issued to them without actually paying for any of the shares.