Exchange ratio

In a share funded deal the exchange ratio is the term the two sides negotiate directly, and almost everything else in the transaction follows from it: the number of new shares issued, the denominator of pro forma earnings per share, and the percentage of the combined company each shareholder base ends up owning.

It is normally quoted per share, which is why it says nothing on its own about control. A ratio of 0.70 is consistent with the target's holders owning a tenth of the combination or half of it, depending on the two share counts. Multiply the ratio by the target's shares to get the new shares issued, then divide by the combined count to get the ownership split, which is the number that governance is argued against.

The ratio can be written two ways. Fix the ratio and the value delivered floats with the acquirer's share price. Fix the value and the ratio floats instead, so the share count and the ownership are unknown until shortly before completion. Which one is chosen decides which shareholder base carries the acquirer's price risk between signing and completion.

In a deal struck at relative value with no premium, the ownership split should equal each side's share of combined equity value. Where it does not, either somebody is paying a premium or the ratio was struck on something other than value, and both are worth asking about.