Stock-for-Stock Merger
An acquisition in which target shareholders receive shares of the acquiring company at a fixed exchange ratio instead of cash.
What is Stock-for-Stock Merger?
A stock-for-stock merger is an acquisition structure in which shareholders of the target company receive newly issued shares of the acquiring company as consideration, at a fixed exchange ratio negotiated in the merger agreement, rather than cash. The exchange ratio determines how many acquirer shares each target share converts into, based on the relative valuations of both companies at announcement. Stock-for-stock mergers are generally structured as tax-free reorganizations under Section 368 of the Internal Revenue Code, allowing target shareholders to defer capital gains taxes until they sell the acquirer's shares. They avoid the need for the acquirer to raise cash or take on additional debt, but dilute the acquirer's existing shareholders by increasing its share count. Exchange ratios are subject to collar arrangements that adjust if either company's share price moves significantly before closing.
Example
In April 2018, T-Mobile US, Inc. and Sprint Corporation announced a stock-for-stock merger in which Sprint shareholders would receive a fixed exchange ratio of 0.10256 shares of T-Mobile for each Sprint share—equivalent to a value of approximately $6.62 per Sprint share at announcement, representing a premium of approximately 18%. The merger, completed in April 2020 after extended regulatory review, created a combined entity with approximately 100 million customers and a significantly strengthened 5G network position.