Swap Ratio

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Swap Ratio
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Swap is an agreement between two entities. The conditions of the exchange and details of the transaction are set in the swap transaction. Swaps are divided into many categories and can be classified differently according to criteria.

Swap Ratio is an exchange rate in corporate finance. In this process it is the exchange rate of shares of the merged companies. A purchase transaction does not have to be made in cash only. Actions can be gradually converted and for this, we use the necessary factors. There are indicators that show the number of shares that the acquiring company must issue for each target company. There is no specific formula for calculating the ratio in specific situations. It depends on many variables.

Calculating the Swap factor is a necessary thing to create a process. Values such as:

  • company size,
  • earnings per share,
  • bookvalue,
  • strategic factors

are needed to calculate the swap ratio[1].

The main ratio used in the swap ratio refers to the time in which the shareholders of the company being acquired receive the shares of the buying company. This shows the strength and size of the two companies. Of course, if during the exchange one company has to offer a larger number of shares in exchange for one share, it is assumed that the offering company is less efficient. While the whole enterprise is being carried out so that in the future two companies will bring much greater value-added than before the merger.

Exchange Process

For example, if company A acquires company B and offers a 1: 3 conversion ratio, it will issue one share of its own company (company A) for every three shares of company B that will be taken over. If enterprise B has 6 outstanding equity interests and all of them is acquired by enterprise A, then enterprise A will issue 2 new equity interests in company A. To calculate the exchange rate, we take the offer price and divide it by the buying company's share price[2].

The valuation of the buying company unit becomes more complex at the time of purchase. The main reason for this is the decrease in the purchasing power of the buying company. Company units before buying are stronger than after. After completing the transaction units are divided into two companies[3].

The swap ratio gives investors two companies the assurance that the investment will remain unchanged both before and after the transaction. This is extremely important because during the whole process two companies are compared in many respects. The basic application of this factor is the complete elimination of the fraudulent takeover of assets. This situation cannot take place because the factor presented before the transaction remains unchanged even after[4].

Footnotes

  1. Flavell R.R., (2010)
  2. Padmalatha S. Paul J., (2011),
  3. Padmalatha S. Paul J., (2011),
  4. Chatterji S., Hedges P., (2002),

References

Author: Kacper Chmarzyński