Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A client holds shares of a company that is being acquired by another company. The acquiring company offers the target company's shareholders a specific number of its own shares in exchange for each share of the target company. This type of transaction is known as a:
- ASpin-off
- BCash Merger
- CLeveraged Buyout (LBO)
- DStock Swap
Show answer & explanationAnswer & explanation
Correct answer: D. Stock Swap
A stock swap (or share exchange) is a type of merger or acquisition where the acquiring company uses its own stock as currency to purchase the shares of the target company.
Why the other options are wrong
- A. A spin-off is when a parent company separates a subsidiary business into a new independent company.
- B. A cash merger involves payment in cash, not shares.
- C. A leveraged buyout (LBO) involves using a significant amount of borrowed money to acquire a company.
Stock Swap (Share Exchange)
A stock swap is a type of merger or acquisition where the acquiring company pays for the target company by issuing its own shares to the target's shareholders.
- No cash changes hands between companies for the acquisition.
- Target shareholders become shareholders of the acquiring company.
- Can be tax-efficient for target shareholders in some cases.
Memory trick: Stock Swap: 'Shares' are 'Swapped' for 'Shares'.