The acquiring company essentially uses its own stock as cash to purchase the business. Each shareholder of the acquired company will receive a pre-determined number of shares from the acquiring company. Before the swap occurs each party must accurately value their company so that a fair swap ratio can be calculated. Valuation of a company is quite complicated. Not only does fair market value have to be determined, but the investment and intrinsic value needs to be determined as well.
The acquiring company may also need to add a little extra incentive in the form of shares to make sure that the board of directors of the acquired company approve the takeover. After all the valuation is complete, the parties will agree upon a swap ratio. The ratio will determine the number of shares each person will receive from the company that is taking over. When this swap is realised, the shareholders receive the new stock and own a share in the new company. Sometimes, a part of the agreement will not allow the new shareholders to sell for a certain time period to avoid a sudden drop in share price. This is a form of a shareholder rights plan or poison pill strategy that is used to combat hostile takeovers. When all things come together and are fair, then the takeover will proceed without incident.
In South Korea, the merger ratio is defined by a certain formula according to the law, if both companies are listed on the KRX.
For example, in 2010, two companies came together to form GenOn Energy, Mirant, and RRI Energy. The Mirant shareholders were given 2.885 shares of RRI for every share of Mirant that they owned. This stock swap helped facilitate the takeover by making the Mirant shareholders an attractive offer, thus convincing Mirant's board of directors to allow the takeover.
In 2014, South Korean Internet giant Daum Communications merged with Kakao Corp to form Daum Kakao in a stock swap deal. The merger ratio was approximately 1.14 so it is regarded as backdoor listing for Kakao.
In 2017, Disney announced it will acquire most of 21st Century Fox assets in an all-stock deal valued at $52 Billion ($66 Billion if debt is included). With the acquired company shareholders owning 25% of the combined company, and Disney shareholders owning 75% majority.
Stock swaps can also happen internally within a company. Starbucks has used this strategy in the past. When the stock options they offered to their employees dropped so low in price that they became virtually worthless, Starbucks offered a swap option. The company allowed the employees to swap their worthless shares for more that had a higher value.
Denway Motors Limited (former stock code: SEHK: 203) was an investment holding company listed in Hong kong. It engages in the manufacturing, assembly and trading of motor vehicles and automotive equipment and parts in China and Hong Kong through its group companies. It owns 50% of Guangqi Honda, a joint venture with Honda in Guangzhou, China.
The company's shares were oversubscribed more than 600 times when it was first listed in Hong Kong. In 2010, shareholders approved the privatization of Denway Motors by its parent company, Guangzhou Automobile Group Co., Ltd(also known as GAC Group). Denway Motors was delisted on 25 August 2010, replaced by the listing of Guangzhou Automobile Group on 30 August 2010 via stock swap.MStar
MStar Semiconductor, Inc. (Chinese: 晨星半導體股份有限公司; pinyin: Chénxīng Bàndǎotǐ Gǔfèn Yǒuxiàn Gōngsī) was a Taiwanese fabless semiconductor company specializing in mixed-mode integrated circuit technologies, based in Hsinchu Hsien. MStar made hardware for multimedia and wireless communications, in the form of display ICs and mixed-mode (i.e. combining analog and digital functions) ASIC/IPs, in addition to chip sets for GSM mobile handsets. MStar employed approx. 1300 in more than 10 branches worldwide. The company's revenue was around US$1067 million in 2010. The growth has been substantial, their revenue in 2005 was US$175 million. MStar is listed on the Taiwan Stock Exchange under the code 3697.MStar was often referred as "Little-M" in Chinese community, as a contrary part of the bigger semiconductor company "Big-M", a.k.a. MediaTek.
MStar was a spin-off (2-1 stock split) from System General Technology in May 2002, where the power IC product line stayed in System General Technology while the employees with the display and RFID product lines transferred to the new spin-off. After the spin-off, a 1-2 stock swap was taken to exchange the two companies back to their corresponding shareholders. Chairman of MStar was Wayne Liang (梁公偉), while Steve Yang (楊偉毅) was president and co-founder.
In 2004, after being involved in a court case where in a ruling by the International Trade Commission (ITC), MStar Semiconductor were found guilty over infringing on a patent held by Genesis Microchip for a method to improve images on liquid-crystal-display (LCD) monitors and flat screen TVs.