Answers / M&A Advisory

What is the difference between a fixed and a floating exchange ratio in a stock-for-stock deal, and who bears the price risk?

A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

In a stock deal the consideration is acquirer shares, and the exchange ratio sets how many. A fixed exchange ratio fixes the number of acquirer shares per target share, so the target's shareholders bear the risk of the acquirer's share price moving between signing and closing — the deal's dollar value floats with the acquirer's stock. A floating (fixed-value) ratio fixes the dollar value per target share and flexes the share count at closing, so the acquirer bears the dilution risk if its price falls (it issues more shares). Which is used reflects negotiation and conviction about the acquirer's stock; collars are often added to cap each side's exposure — a fixed ratio with a value collar, or a floating ratio with a share-count collar. The core point in an interview is matching who carries the market risk to the structure.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Fixed ratio: set share count; target bears acquirer price risk (value floats)
  • ✓Floating ratio: set value; acquirer bears dilution risk (count floats)
  • ✓Collars cap each side's exposure
  • ✓Choice reflects conviction in acquirer stock

COMMON MISTAKES

  • ✗Mixing up who bears the risk in each
  • ✗Not knowing collars sit on top
  • ✗Confusing fixed-value with fixed-ratio

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