What is a Stock Swap?

What is a Stock Swap?

Before understanding Stock Swap, At First, we need to know Who is an acquiree and acquirer.

Acquiree is the company that is being acquired or purchased in a merger or acquisition process.

Acquirer is the company that is purchasing another company in a process of merger or acquisition.

Stock Swap

Acquiring a business or company may be paid in various forms, such as cash, securities or by taking over the liabilities of the acquiree. When the shareholders in the acquiree company are given shares of the acquirer company as part of the acquisition, it is called a stock swap.

A benefit of stock swap is that the cash outflow for the acquirer company is minimized. Higher the value of the acquirer company’s shares, the fewer the shares it needs to issue for the acquisition. However, the share issue does cause dilution of promoter’s stake in the acquirer company. Further, even earnings per share (EPS) of the acquirer company may be diluted, if the earnings of the acquiree company are not adequate.

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