Stock swap

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Examples
  • In 2010, two companies - Mirant and RRI Energy - came together to form GenOn Energy. The Mirant shareholders were given 2.885 shares of RRI for every share of Mirant that they owned. This stock swap helped facilitate the takeover by making the Mirant shareholders an attractive offer, thus convincing Mirant's board of directors to allow the takeover.
  • In 2014, South Korean Internet giant Daum Communications merged with Kakao Corp to form Daum Kakao in a stock swap deal. The merger ratio was approximately 1.14 so it is regarded as backdoor listing for Kakao.
  • In 2017, Disney announced it will acquire most of 21st Century Fox assets in an all-stock deal valued at $52 Billion ($66 Billion if debt is included). With the acquired company shareholders owning 25% of the combined company, and Disney shareholders owning 75% majority.
Not to be confused with equity swap.

In corporate finance a stock swap is the exchange of one equity-based asset for another, [1] where, during the merger or acquisition, the swap provides an opportunity to pay with stock rather than with cash.

Corporate finance area of finance dealing with the sources of funding and the capital structure of corporations

Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

Mergers and acquisitions transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Contents

Overview

The acquiring company essentially uses its own stock as cash to purchase the business. Each shareholder of the acquired company will receive a pre-determined number of shares from the acquiring company.

A shareholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders may be referred to as members of a corporation. By law, a person is not a shareholder in a corporation until their name and other details are entered in the corporation's register of shareholders or members.

Before the swap occurs each party must accurately value their company so that a fair "swap ratio" can be calculated. The valuation of a company is complicated in general; here though, additional to fair market value, the investment- and intrinsic value are to be determined as well.

In corporate finance, the swap ratio is an exchange rate of the shares of the companies that undergo a merger; see Stock swap and Mergers and acquisitions #Stock. This ratio is calculated by the valuation of various assets and liabilities of the merging companies. The swap ratio determines the control that each group of shareholders of the companies shall have over the combined firm: essentially a function of the relative value of the strategic and financial results of the two companies.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.

The term fair market value is used throughout the Internal Revenue Code among other federal statutory laws in the USA including Bankruptcy, many state laws, and several regulatory bodies. In litigation in many jurisdictions in the United States, the fair market value is determined at a hearing. In certain jurisdictions, the courts are required to hold fair market hearings, even if the borrowers or the loans guarantors waived their rights to such a hearing in the loan documents.

After the valuation is complete, the parties will agree upon a swap ratio. The ratio will determine the number of shares that each shareholder will receive. The acquiring company may also need to add an extra incentive in the form of shares to ensure that the board of directors of the acquired company approve the takeover. In South Korea, the merger ratio is defined by a certain formula according to the law, if both companies are listed on the KRX.

Board of directors Type of governing body for an organisation

A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit business, nonprofit organization, or a government agency. Such a board's powers, duties, and responsibilities are determined by government regulations and the organization's own constitution and bylaws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.

South Korea Republic in East Asia

South Korea is a country in East Asia, constituting the southern part of the Korean Peninsula and sharing a land border with North Korea. The name Korea is derived from Goguryeo which was one of the great powers in East Asia during its time, ruling most of the Korean Peninsula, Manchuria, parts of the Russian Far East and Inner Mongolia under Gwanggaeto the Great. Its capital, Seoul, is a major global city and half of South Korea's over 51 million people live in the Seoul Capital Area, the fourth largest metropolitan economy in the world.

Korea Exchange Securities exchange operator in South Korea

Korea Exchange (KRX) is the sole securities exchange operator in South Korea. It is headquartered in Busan, and has an office for cash markets and market oversight in Seoul.

When this swap is realised, the shareholders receive the new stock and own a share in the new company. Sometimes, a part of the agreement will not allow the new shareholders to sell for a certain time period to avoid a sudden drop in share price. This is a form of a shareholder rights plan or poison pill strategy that is used to combat hostile takeovers. When all things come together and are fair, then the takeover will proceed without incident.

A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover.

Internal swap

Stock swaps can also happen internally within a company. Starbucks has used this strategy in the past. When the stock options they offered to their employees dropped so low in price that they became virtually worthless, Starbucks offered a swap option. The company allowed the employees to swap their worthless shares for more that had a higher value. [2] [3] [4] [5]

Starbucks American multinational coffee company

Starbucks Corporation is an American coffee company and coffeehouse chain. Starbucks was founded in Seattle, Washington in 1971. As of early 2019, the company operates over 30,000 locations worldwide.

Related Research Articles

Equity (finance) difference between the value of the assets/interest and the cost of the liabilities of something owned

In accounting, equity is the difference between the value of the assets and the value of the liabilities of something owned. It is governed by the following equation:

In finance, an equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively traded.

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value".

Treasury stock

A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market.

Employee stock option complex call option on the common stock of a company, granted by the company to an employee

An employee stock option (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options.

Greenmail or greenmailing is the action of purchasing enough shares in a firm to challenge a firm's leadership with the threat of a hostile takeover to force the target company to buy the purchased shares back at a premium in order to prevent the potential takeover.

Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders. Enterprise value is one of the fundamental metrics used in business valuation, financial modeling, accounting, portfolio analysis, and risk analysis.

Risk arbitrage, also known as merger arbitrage, is an investment strategy that speculates on the successful completion of mergers and acquisitions. An investor that employs this strategy is known as an arbitrageur. Risk arbitrage is a type of event-driven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event.

In finance, intrinsic value or fundamentalvalue is the "true, inherent, and essential value" of an asset independent of its market value.

A reverse takeover or reverse merger takeover is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company. Sometimes, conversely, the private company is bought by the public listed company through an asset swap and share issue.

Stock dilution, also known as equity dilution, is the decrease in existing shareholders’ ownership percentage of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effect on the ownership percentage of existing shareholders. This increase in the number of shares outstanding can result from a primary market offering, employees exercising stock options, or by issuance or conversion of convertible bonds, preferred shares or warrants into stock. This dilution can shift fundamental positions of the stock such as ownership percentage, voting control, earnings per share, and the value of individual shares.

A squeeze-out or squeezeout, sometimes synonymous with freeze-out (freezeout), is the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation.

Share repurchase is the re-acquisition by a company of its own stock. It represents a more flexible way of returning money to shareholders.

The following outline is provided as an overview of and topical guide to finance:

Management is a type of labor but with a special role-coordinating the activities of inputs and carrying out the contracts agreed among inputs, all of which can be characterized as "decision making." Managers usually face disciplinary forces by making themselves irreplaceable in a way that the company would lose without them. A manager has an incentive to invest the firm's resources in assets whose value is higher under him than under the best alternative manager, even when such investments are not value-maximizing.

References

  1. "Stock Swap". Investopedia . Retrieved 5 March 2019.
  2. Investopedia. Division of IAC. 2014. Web. July 21st, 2014. http://www.investopedia.com/terms/s/swap.asp
  3. US Legal. US Legal Incorporated. Web. July 21st, 2014. http://defenitions.uslegal.com/s/stock-swap.
  4. Bates, Thomas, and David Kidwell, and Robert Parino. Fundamentals of Corporate Finance. New Jersey: John Wiley and Sons, 2012. Print
  5. Merrit, Cam. Demand Media. The Nest. Web. July 21st, 2014. http://budgetting.thenest.com/stock-%5B%5Dswaps-work-22564.html