What Is a Swap Ratio?

Swap ratio is the ratio at which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. To calculate the swap ratio, companies analyze financial ratios such as book value, earnings per share, profits after tax, and dividends paid, as well as other factors, such as the reasons for the merger or acquisition. The current market prices of the target and acquiring company's stock are compared along with their respective financial situations. A ratio is when configured which states the rate at which the target company's shareholders will receive acquiring company shares of stock for every one share of target company stock they currently hold.

Swap Ratio Explained

A swap ratio tells the shareholders of a target company how many shares of the acquiring company's stock they will receive for every one share of target company stock they currently own. For example, if an acquiring company offers a swap ratio of 1.5:1, it will provide 1.5 shares of its own company for every 1 share of the target company. A shareholder of the target company will end up with 50% more shares than they had before, but their new shares will be for the acquiring company and have the price of the acquiring company. Shares of the target company may cease to exist.

The concept of a swap ratio can also be applied to a debt/equity swap. A debut equity swap occurs when a company wants investors to trade their bonds issued by the target company for the acquiring company's shares of stock. The same process is applied and a swap ratio is given which tells the target company's bond investors how many shares of stock of the acquiring company they will receive for each bond they trade in.