Stock for stock merger7 Jan 2022 11:02
When the merger is stock for stock, the acquiring company proposes payment of a certain number of its equity shares to the target firm in exchange for all of the target company's shares. Provided the target company accepts the offer (which includes a specified conversion ratio), the acquiring company issues certificates to the target firm's shareholders, entitling them to trade in their current shares for rights to acquire a pro-rata number of the acquiring firm's shares. The acquiring firm issues new shares (adding to its total number of shares outstanding) to provide shares for all the target firm's converted shares.
This action, of course, causes the dilution of the current shareholders' equity, since there are now more total shares outstanding for the same company. However, at the same time, the acquiring company obtains all of the target firm's assets and liabilities, thus effectively neutralizing the effects of the dilution. Should the merger prove beneficial and provide sufficient synergy, the current shareholders will gain in the long run from the additional appreciation provided by the target company's assets.