Fixed exchange ratio

The share count is certain from the day the agreement is signed. What is not certain is what those shares will be worth when they arrive, which can be many months later once merger control clearance, foreign investment screening and, for a UK scheme of arrangement, a court timetable have run their course.

The consequence is that the target's shareholders bear the acquirer's share price risk over that period. If the acquirer's shares fall a quarter, the value they receive falls a quarter, with no term of the agreement having changed.

The common error is to hear the word fixed and conclude the target is protected. It is protected on the thing it did not need protecting on. What a fixed ratio genuinely delivers is certainty of ownership: the target's holders know exactly what percentage of the combined company they will own whatever the price does, which is what board seats and governance terms are negotiated against.

It is by far the more common structure, because an acquirer's board will not approve a share issue whose size it cannot state, and because it carries the message a share deal is meant to carry, that both shareholder bases are sharing the fortunes of the combined business from the moment of signing.

A related consequence catches people out. The premium quoted on announcement is a snapshot computed on the acquirer's price that day, so under a fixed ratio the premium actually delivered moves every day until completion and can disappear entirely without anything being renegotiated.