Swap ratio is an exchange ratio used
in case of mergers and acquisitions. It is the ratio in which the acquiring
company offers its own shares in exchange for the target company's shares. To
calculate the swap ratio, companies analyze financial ratios such as book value,
earnings per share, profits after tax as well as other factors, such as size of
company, long-term debts, strategic reasons for the merger or acquisition and so
on.
For example, if company A is acquiring company B and offers a swap ratio of 1:5, it will issue one share of its own company (company A) for every 5 shares of the company B being acquired. In other words, if company B has 10 crore outstanding equity shares and 100% of it is being acquired by company A, then company A will issue 2 crore new equity shares of company A to the shareholders of company B, proportionately.
For example, if company A is acquiring company B and offers a swap ratio of 1:5, it will issue one share of its own company (company A) for every 5 shares of the company B being acquired. In other words, if company B has 10 crore outstanding equity shares and 100% of it is being acquired by company A, then company A will issue 2 crore new equity shares of company A to the shareholders of company B, proportionately.
