A:

The term "stock-for-stock" is popularly used in two different contexts, and it regularly makes business news headlines in both.

"Stock-for-stock" most commonly appears in headlines in reference to the stock-for-stock merger. In this type of merger, the acquiring company trades shareholders of the target company a predetermined number of shares of its own stock for each share of the target company's stock. This type of merger is often said to be more efficient than traditional cash-for-stock mergers because the transaction costs involved are substantially lower and the stock-for-stock arrangement doesn't stretch the acquiring company's cash position quite as much.

In a merger funded entirely with cash, the acquiring company may have to go to the debt market to raise the cash to pay for the merger. Because large acquisitions are very expensive, acquiring companies often issue expensive equity and debt that they otherwise would not dream of issuing, such as short-term convertible notes or convertible preferred shares. Making a deal happen with stock can save time and money. Deals that are entirely funded with stock are known as "all-stock" deals. However, it is more common to see a combination tender offer and stock-for-stock deal than an all-stock deal.

You may also hear the term "stock-for-stock" used in the context of executive compensation, particularly in reference to employee stock option grants. Typically, executives are the only group of employees who are awarded so many stock options that they can't afford to use them all - this is one case in which an executive may receive a stock-for-stock award or exercise a grant by paying "stock-for-stock" .

When an executive is granted either a non-qualified stock option (NSO) or an incentive stock option (ISO), he or she actually needs to get the shares that underlie the option in order to make the option worth anything. Both non-qualified stock options and incentive stock options are usually granted under the condition that the executive cannot sell them or give them away - he or she must exchange the options for stock. These terms are written into executives' contracts to increase their share ownership.

Let's say an executive already owns 80,000 shares in the company for which she works, and the company awards her 50,000 ISOs at an exercise price of $5 per option. The executive must come up with $250,000 (50,000 x $5) in order to exercise the ISOs and get the underlying stocks (which we'll assume are currently trading at $12.50). In a stock-for-stock exercise, the grantee can transfer 20,000 shares of her already-owned stock to the company (20,000 x $12.50 = $250,000). Once the executive has met all required holding periods (usually one year), she can get the grant, and it will not have cost her interest payments, as it would have if she had taken out a loan from the bank to pay for the exercise.

To learn more about M&A, see our tutorial on The Basics Of Mergers And Acquisitions. For more on management compensation, check out Option Compensation - Part One and Option Compensation - Part Two.

RELATED FAQS
  1. What is a stock-for-stock merger and how does this corporate action affect existing ...

    First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are ... Read Answer >>
  2. In M&A how does an all-stock or all-cash deal affect the equity of the buying company? ...

    Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular in the modern ... Read Answer >>
  3. Why do some mergers and acqusitions fall through?

    Most merger and acquisition (M&A) activities are carried out successfully, but from time to time, you will hear that a deal ... Read Answer >>
  4. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  5. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
Related Articles
  1. Investing

    The Merger: What To Do When Companies Converge

    Mergers occur when it’s beneficial for two companies to combine business operations. The question is; if you’re invested in a company that’s involved in a merger, will it benefit you?
  2. Managing Wealth

    Get The Most Out Of Employee Stock Options

    Stock options can be lucrative for employees who know how to avoid unnecessary taxes.
  3. Taxes

    How Are Stock Options Taxed & Reported?

    That depends on the type of stock option you have. A rundown of the tax treatment for statutory and nonstatutory, or non-qualified, options.
  4. Managing Wealth

    Introduction To Incentive Stock Options

    Here are some basic highlights of how ISOs work and the ways they can be used.
  5. Managing Wealth

    Get The Most Out Of Employee Stock Options

    Many corporations encourage employees to participate in the company’s growth by offering them a piece of the pie. That means employee stock options.
  6. Financial Advisor

    The Best Strategies to Manage Your Stock Options

    We look at strategies to help manage taxes and the exercise of incentive and non-qualified stock options.
  7. Taxes

    10 Tax Tips For Stock Options

    Options and restricted stock are a great perk--if you don't get caught in a tax trap. Here's what you need to know.
  8. Trading

    Should Employees Be Compensated With Stock Options?

    Learn the good, the bad and the ugly sides of this type of payout.
RELATED TERMS
  1. Stock-For-Stock

    1. In the context of mergers and acquisitions, the exchange of ...
  2. Reload Option

    A type of employee compensation in which additional stock options ...
  3. Mergers and Acquisitions - M&A

    A merger is a combination of two companies to form a new company, ...
  4. Non-Qualified Stock Option - NSO

    A type of employee stock option where you pay ordinary income ...
  5. Incentive Stock Option - ISO

    A type of employee stock option with a tax benefit, when you ...
  6. Equity Compensation

    This is one way to attract and retain employees to a startup ...
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center