Investor's wiki

Stock-for-Stock

Stock-for-Stock

What Is Stock-for-Stock?

Stock-for-stock is a type of compensation deal between two companies in which stock is partly utilized toward the cost of acquisition. A set number of shares of one company are swapped with the shares of one more as an approach to covering costs. Stock swaps additionally happen in employee stock compensation programs, in which employees exchange stock that has previously vested to receive more stock options.

Grasping Stock-for-Stock

With regards to mergers and acquisitions, stock-for-stock alludes to the exchange of a gaining company's stock for the stock of the acquired company at a foreordained rate. Normally, just a portion of a merger is completed with a stock-for-stock transaction, with the other expenses being covered with cash or other payment methods.

For instance, to fulfill the expenses of an acquisition, a gaining company might involve a combination of two for three stock-for-stock exchanges with shareholders of the target company and a tender offer of cash.

Stock-for-Stock and Employee Stock Option Plans

Stock-for-stock is likewise a method of fulfilling the option price in an employee stock option compensation plan. Under these compensation programs, employees are granted stock options however must pay the company the option price before they are given the grant. By trading mature stock (stock that has been held for a required holding period), the grantee can receive their options without paying for them. After a given time span, grantees are given back the stock they used to pay for their options.

Where potential, grantees frequently exploit a stock-for-stock exchange, as they typically increase a grantee's ownership position and require no cash outlay. Non-employee shareholders contend that stock-for-stock option price satisfaction adds to the generally high expense of granting employees options, as the employees end up not following through on the option cost, which can amount to be a lot of cash assuming all employees granted options exploit stock-for-stock activities.

Special Considerations

At the point when an executive is granted either an incentive stock option (ISO), or a non-qualified stock option (NSO), that employee must really get the shares that underlie the option to cause the option to have any value.

Both non-qualified stock options and incentive stock options are regularly granted under the condition that the executive is forbidden from selling them or offering them since they are commanded to exchange the options for stock. These terms are written into an executive's contract.

Stock-for-Stock Example

Companies engaged with stock-for-stock mergers enter an agreement to exchange shares in light of a set ratio. In the event that company ABC and company XYZ consent to a 1-for-2 stock merger, XYZ shareholders will receive one ABC share for each two shares they as of now hold.

Thusly, XYZ shares will cease trading and the number of outstanding ABC shares will increase following the completion of the merger. The post-merger ABC share price relies upon the market's assessment representing things to come earnings possibilities for the recently merged entity.

Highlights

  • A stock-for-stock exchange likewise happens in employee stock option compensation plans, when employees exchange mature stock for stock options.
  • Stock-for-stock is a type of transaction where one company's stock is swapped for that of another company, generally as part of a merger deal.
  • This sort of deal is utilized as a way for the procuring company to cover the costs of the acquisition.