Imagine that the fictional company John`s Chocolates Inc. wants to buy a rival, Andy`s Chocolate Corp. in a stock exchange. The company targeted for the acquisition could use the share swea as a strategy to resist the acquisition by claiming that the conditions are unfavourable, i.e. it is a way to seek better terms. In most cases, when the share exchange is concluded, shareholders are not allowed to sell them for a specified period of time. If this swap is realized, shareholders will receive the new share and hold a stake in the new company. Sometimes part of the agreement will not allow new shareholders to sell for a period of time to avoid a sudden fall in prices. It is a shareholder law plan or a strategy for poison pills that fight hostile acquisitions. If everything comes together and it is fair, the acquisition will be made without incident. Like other types of swap contracts, equity swaps are mainly used by financial institutions, including investment banks List of the Best 100 Investment Banks in the World. The best investment banks on the list are Goldman Sachs, Morgan Stanley, BAML, JP Morgan, Blackstone, Rothschild, Scotiabank, RBC, UBS, Wells Fargo, Deutsche Bank, Citi, Macquarie, HSBC, ICBC, Credit Suisse, Bank of America Merril Lynch, hedge funds and credit institutions or large corporations. On the other hand, Investor B holds a long position in ABC Corp.
shares. Investor B believes that the company`s share price will be volatile in the short term, so he wants to hedge the potential risk of a price drop. Fund A and Investor B can enter into a share exchange agreement between them in order to achieve their respective objectives. The swap will include the exchange of future cash flows. To make the exchange attractive, the beneficiary generally offers a “premium” to the shareholders of the other company, i.e. the shares receive a higher value than the listed shareholders. Share swaps can be used to cover exhibitions. Derivatives are often used to guard against negative returns on an action without giving up property rights.
For example, an investor holds a few shares, but he thinks that recent macroeconomic trends will drive down the price of equities in the short term, although he expects the stock to appreciate considerably in the long run. Thus, it could enter into a swap agreement to mitigate any short-term negative effects on the stock without selling the shares. Sometimes target companies that want to avoid acquisition tend to use stock exchange as a strategy to oppose the acquisition. In this way, target companies will be able to benefit from better conditions by stating that existing conditions are not favourable. In addition, new shareholders are not allowed to sell the shares immediately after the share exchange. It refers to the situation in which ownership of the shares of the target company is converted into ownership of the acquisition company`s shares, in accordance with a pre-defined swap ratio. Please note that during a stock exchange, the precise valuation of the two merging companies is very important in order to achieve a fair swap ratio. In the case of a merger or acquisition transaction, the exchange of shares may represent the entire deal or form part of the agreement with other agreements, mainly in cash.
Finally, share exchange contracts can allow you to invest in securities that would otherwise not be available to an investor. The replication of share returns through an exchange of shares allows the investor to overcome certain legal restrictions without breaking the law.