Calculation Exchange Ratio
Calculation Exchange Ratio
Calculation Exchange Ratio
P.V. Viswanath
Framework
In a stock-for-stock deal, the exchange ratio is the number of buyer
shares per target share.
In a cash deal, the cash exchange ratio is the number of dollars
exchanged per target share.
To determine the correct ratio in a cash deal, compare the cash
payment to the intrinsic value of the asset.
In principle, the rule is the same in the stock deal as well; however, in
this case, both buyer and target shares have to be valued.
The greater the synergy, the greater the possibility for a win-win deal.
This analysis provides the data needed for negotation between buyer
and target.
P.V. Viswanath
Terms
ER= exchange ratio: buyer shares per target share.
ER1= max acceptable exchange ratio for buyer.
ER2= max acceptable exchange ratio for seller.
P1= buyers price before transaction
P2= targets price before transaction
P1= buyers shares outstanding before transaction
P2= targets shares outstanding before transaction
P12= price of combined company
DCF12= discounted cashflow value of combined company
P.V. Viswanath
DCF12 P1S1
ER1
P1S 2
P2 S1
Sellers Min Acceptable ER
Exch
Ratio
2
DCF12 P2 S 2
P12ER2 P2
P.V. Viswanath
Share-for-Share Exchange
P1
P2
S1
S2
60
40
100
100
Exchange Ratio
I. Both Win
$7,000
$9,000
P.V. Viswanath
$11,000
$13,000
DCF12 P1S1
ER1
S2
P.V. Viswanath
Cash-for-Share Exchange
Win-Loss Boundaries: DCF Analysis
60
40
100
100
80.00
Exchange Ratio
P1
P2
S1
S2
70.00
60.00
I. Both Win
50.00
40.00
30.00
III. Both
Lose
20.00
$7,000
$9,000
$11,000
$13,000
Buyer's Maximum ER
Target's Minimum ER
P.V. Viswanath
.PE12
S2
P1 S 2
P.V. Viswanath
P.V. Viswanath
ER = Ptarget/Pbuyer
ER
P.V. Viswanath
S Buyer
S T arg et
10