The valuation of the share exchange ratio in stock for stock transactions. Allocation of synergies and financial implications

Abstract

The adequate estimation of the share exchange ratio plays a pivotal role with reference to M&As, particularly in stock for stock transactions. This paper aims to explore relevant factors impacting the share swap mechanism in establishing an appropriate range of values to attribute during absorption or consolidation transactions. The share exchange ratio – a key measure to reveal the correct number of shares to issue in exchange for each individual share of the target entity – not only has financial implications for the business combination but can also reflect the strategic dimension and the potential synergies between the merging enterprises. Therefore, by advancing a ‘comprehensive’ analysis of the economic-strategic factors and value components, we provide new insights into the complex process of determining the above-mentioned ratio. Various methodologies are examined, taking into account both the stand-alone view of the company and the potential synergies expected from the merger. In particular, we show how the synergistic value (often excluded for simplification) can be variously allocated within the swap ratio structure. To cover a gap in the literature, we propose four interconnected approaches and conclude by defining a synthesis formula based on a reasonable criterion for the potential sharing of synergies between the involved parties. Analysts, appraisers, and decision-makers can make informed decisions in approaching an optimal and balanced share exchange ratio that maximizes value creation and, in general, the M&A strategy.