Exchange Ratio

You run a small, boutique company that makes high-end hemorrhoid pads. You agree to merge with Ouch-Away, the behemoth Amazon of the hemorrhoid pad industry. But they don’t want to pay cash to buy you out. They are going to use stock.

In effect, they are going to turn your shareholders into shareholders of Ouch-Away. So, they are going to exchange a set number of their shares for each of your shares. The negotiation on the price of the buyout turns to that ratio...the exchange ratio.

Eventually, you decide on a ratio of 0.5 Ouch-Away shares for each share of you company. With your 10 million shares, that exchange ratio means you’ll end up with 5 million Ouch-Away shares once the deal closes.