Floating exchange ratio

The agreement fixes what each target share is worth, say €45 of acquirer stock, and the ratio is struck shortly before completion off the acquirer's share price, normally an average over a defined measurement period rather than a single day's close so that one day of trading cannot decide the outcome.

The target's shareholders are promised a value and receive it. The acquirer issues however many shares that promise costs, which means it issues more shares when its own price is lower, diluting its existing shareholders exactly when their paper is cheapest. Under this structure the acquirer bears the price risk.

The arithmetic is the agreed value divided by the acquirer's price, never the reverse. €45 of value at a price of €60 is 0.750 shares. The same €45 at a price of €45 is 1.000 shares. Inverting it gives a number that moves the wrong way when the acquirer's price falls, which is the standard distractor.

It is the less common structure. Acquirer boards resist open ended dilution, and a fixed value promise makes the stock look like a cash substitute, which invites the question of why cash is not being offered instead. Where it does appear, it is usually because the run to completion is short or because the target's board had the leverage to insist on value certainty.

Note the second consequence, which is often forgotten. Fixing the value unfixes the ownership. Neither side knows what percentage of the combined company it will hold until the ratio is struck, and a fall in the acquirer's price hands the target's shareholders a larger slice.