{"id":23894,"date":"2021-08-17T19:27:10","date_gmt":"2021-08-18T00:27:10","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=23894"},"modified":"2025-04-01T07:53:11","modified_gmt":"2025-04-01T12:53:11","slug":"exchange-ratios-in-ma-deals-fixed-floating-and-collars","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/exchange-ratios-in-ma-deals-fixed-floating-and-collars\/","title":{"rendered":"The Exchange Ratio in M&#038;A Deals: Fixed, Floating, and Collars (20:05)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Exchange Ratios in M&amp;A Deals: Fixed, Floating, and Collars<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/exchange-ratios-in-ma-deals-fixed-floating-and-collars\/#The_Exchange_Ratio_in_M_A_Deals_Motivations\">The Exchange Ratio in M&amp;A Deals: Motivations<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/exchange-ratios-in-ma-deals-fixed-floating-and-collars\/#The_Exchange_Ratio_in_M_A_Fixed_Exchange_Ratio_with_a_Collar\">The Exchange Ratio in M&amp;A: Fixed Exchange Ratio with a Collar<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/exchange-ratios-in-ma-deals-fixed-floating-and-collars\/#The_Exchange_Ratio_in_M_A_Floating_Exchange_Ratio_with_a_Collar\">The Exchange Ratio in M&amp;A: Floating Exchange Ratio with a Collar<\/a><\/li><\/ul><\/nav><\/div>\n\n<p><strong>Exchange Ratio in M&amp;A Deals Definition:<\/strong> In mergers and acquisitions, the\u00a0<strong>Exchange Ratio<\/strong> lets the Buyer and Seller frame the deal in terms of the number of Buyer shares the Seller will receive rather than a strict &#8220;price&#8221;; variations of this structure allow the shares issued to vary as the Buyer&#8217;s share price changes.<\/p>\n<p>In merger models, people often assume that the Buyer uses specific percentages of Cash, Debt, and Stock to acquire the Seller.<\/p>\n<p>But in real life, it\u2019s more common to use an Exchange Ratio in 100% Stock deals, where the Seller receives X new shares of the Buyer for each 1 of its own shares.<\/p>\n<p>To figure out this Exchange Ratio, you could start with the control premium the Buyer is willing to pay.<\/p>\n<p>For example, if the Seller\u2019s Current Share Price is $20.00, and the Buyer is willing to pay a 25% premium, the offer price is $25.00 per share.<\/p>\n<p>If the Buyer\u2019s Current Share Price is $20.00, then the Exchange Ratio = Offer Price \/ Buyer\u2019s Share Price = $25.00 \/ $20.00 = 1.25x.<\/p>\n<p>If this Exchange Ratio is Fixed, then the Seller will get 1.25 of new shares from the Buyer for each 1 of its shares.<\/p>\n<div class='code-block code-block-12' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/03\/11231532\/adv-ma-modeling-square.png\" alt=\"Advanced M&A Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Advanced M&A Modeling for Investment Banking<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Build a quarterly merger model with variable close dates<\/h4>\n              <p>You\u2019ll learn to build \u201cindustrial-strength\u201d M&A models for real-life deals<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Analyze tax-free spinoff transactions<\/h4>\n            <p>Learn more advanced structures and analyze deals using Sum-of-the-Parts valuation<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Model majority-stake acquisitions<\/h4>\n            <p>Understand the model setup and how the EPS accretion\/dilution is counterintuitive<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/advanced-ma-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Advanced-MA-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"The_Exchange_Ratio_in_M_A_Deals_Motivations\"><\/span>The Exchange Ratio in M&amp;A Deals: Motivations<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The most serious problem here is that if the Buyer\u2019s Share Price falls, the Seller will get a lower purchase price because the Buyer\u2019s shares will be worth less!<\/p>\n<p>One solution is to use a Floating Exchange Ratio, which guarantees a fixed Equity Purchase Price, but which allows the number of shares issued to the Seller to vary.<\/p>\n<p>For example, maybe the Equity Purchase Price is fixed at $125 million.<\/p>\n<p>If the Buyer\u2019s Share Price is $20.00, the Seller will get 6.25 million shares. But if the Buyer\u2019s Share Price drops to $15.00, the Seller will get 12.5 million shares.<\/p>\n<p>The Floating Exchange Ratio doesn\u2019t \u201csolve\u201d these problems in a deal, though, because the Buyer and Seller might have different concerns.<\/p>\n<p>The Buyer doesn\u2019t want its share price to fall and lose ownership in the combined company as a result.<\/p>\n<p>And the Seller wants as much ownership as possible and a somewhat stable price.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Exchange_Ratio_in_M_A_Fixed_Exchange_Ratio_with_a_Collar\"><\/span>The Exchange Ratio in M&amp;A: Fixed Exchange Ratio with a Collar<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>One compromise solution is a structure known as a Collar, which modifies the normal Fixed and Floating Exchange Ratios and changes their behavior in certain share price ranges.<\/p>\n<p>If it\u2019s a Fixed Exchange Ratio with a Collar, the Exchange Ratio is constant within a certain range of Buyer share prices (between the \u201cFloor\u201d and \u201cCap\u201d) but can change outside that range.<\/p>\n<p>For example, if the Buyer\u2019s Share Price is between $15.00 and $25.00, maybe the Exchange Ratio remains Fixed at 1.25x.<\/p>\n<p>Below $15.00, though, the Buyer must issue additional shares such that the Seller receives a minimum purchase price of $93.8 million.<\/p>\n<p>And above $25.00, the Buyer must issue fewer shares such that the Seller receives a maximum purchase price of $156.3 million.<\/p>\n<p>This structure makes it a bit easier to negotiate a deal because both sides get some risk protection.<\/p>\n<p>The Seller always knows the purchase price range, and the Buyer has an idea of what its ownership will be.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Exchange_Ratio_in_M_A_Floating_Exchange_Ratio_with_a_Collar\"><\/span>The Exchange Ratio in M&amp;A: Floating Exchange Ratio with a Collar<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If it\u2019s a Floating Exchange Ratio with a Collar, the Exchange Ratio varies within a range of Buyer Share Prices but becomes Fixed outside it.<\/p>\n<p>For example, maybe the baseline Exchange Ratio is 1.250x, which increases as the Buyer\u2019s Share Price falls and decreases as the Buyer\u2019s share price rises.<\/p>\n<p>But above a 1.667x ratio (Buyer Share Price of $15.00), it remains constant at 1.667x, so the purchase price drops but the Seller\u2019s ownership stays the same.<\/p>\n<p>And below 1.000x (Buyer Share Price of $25.00), it remains constant at 1.000x, so the purchase price increases but the Seller\u2019s ownership stays the same.<\/p>\n<p>The Floating Exchange Ratio with a Collar sets a floor and a cap for the Seller\u2019s ownership, so it\u2019s often the best solution if the main concern of both sides is ownership.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn how Exchange Ratios work in 100% Stock M&#038;A deals, including the differences between Fixed and Floating Exchange Ratios and how structures called \u201cCollars\u201d change the mechanics.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-23894","biws_kb","type-biws_kb","status-publish","hentry","kb_category-ma-and-merger-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/23894","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=23894"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}