What is a 'Stock Swap'
The exchange of one asset for another. A stock swap occurs when shareholders' ownership of the target company's shares are exchanged for shares of the acquiring company as part of a merger or acquisition. During a stock swap, each company's shares must be accurately valued in order to determine a fair swap ratio.
A stock swap can also occur when a stock option is exercised and the original shareholder exchanges their existing number of shares to receive a new greater amount.
BREAKING DOWN 'Stock Swap'
For example, in 2010, utility companies Mirant and RRI Energy merged to form GenOn Energy. Each Mirant shareholder received 2.885 shares of RRI Energy in the stock swap. This means that for every share of Mirant owned, the investor would receive 2.885 share of RRI energy.
Starbucks has also done a stock swap for its employees. Employees were give an opportunity to buy stock options in the company at a discounted price. These options had a exercise price well below the market price, and therefore had a high value. Two years later, the share price of Starbucks dropped below the exercise price, which made these stock option worthless. Starbucks offered its employees the opportunity to swap the stock options by taking the now worthless stock option from them and exchanging them for new stock options which possessed a higher value.