Stock-For-Stock

1. In the context of mergers and acquisitions, the exchange of an acquiring company's stock for the stock of the acquired company at a predetermined rate. Usually, only a portion of a merger is completed with a stock-for-stock transaction, with the rest of the expenses being covered with cash or other payment methods.

2. A method of satisfying the option price in an employee stock option compensation scheme. Under these compensation programs, employees are granted stock options but must pay the company the option price before they are given the grant. By exchanging mature stock (stock that has been held for a required holding period), the grantee can receive his/her options without having to pay for them. After a given time period, grantees are given back the stock they used to pay for their options.

1. For example, in order to satisfy the expenses of an acquisition, an acquiring company may use a combination of two for three stock-for-stock exchange with shareholders of the target company and a tender offer of cash.

2. Where possible, grantees often take advantage of a stock-for-stock exchange, as they usually increase a grantee's ownership position and require no cash outlay. Non-employee shareholders argue that stock-for-stock option price satisfaction adds to the already high expense of granting employees options, as the employees end up not having to pay the option price, which can add up to be a significant amount of cash if all employees granted options take advantage of stock-for-stock exercises.

When an executive is granted either an incentive stock option (ISO), or a non-qualified stock option (NSO) that employee must actually obtain the shares that underlie the option in order to make the option have any value. Both non-qualified stock options and incentive stock options are typically granted under the condition that the executive is forbidden from selling them or giving them away, because he or she is mandated to exchange the options for stock. These terms are written into an executive’s contract.

Companies involved in stock-for-stock mergers enter an agreement to exchange shares based on a set ratio. If company ABC and company XYZ agree to a 1-for-2 stock merger, XYZ shareholders will receive one ABC share for every two shares they presently hold. Consequently, XYZ shares will cease trading and the number of outstanding ABC shares will increase following the completion of the merger. The post-merger ABC share price depends on the market's assessment of the future earnings prospects for the new merged entity.