An acquisition paid in acquirer shares rather than cash, so the target holder's payout moves with the acquirer's share price until closing.
In a stock deal the target's price tracks the acquirer's, scaled by the exchange-ratio. A fixed ratio means the value floats; a fixed value structure adjusts the ratio near closing, sometimes inside a collar that caps the movement.
Arbitrageurs typically buy the target and short the acquirer to lock the spread, which creates persistent selling pressure on the acquirer between announcement and close.
Example: a fixed ratio of 0.62 acquirer shares per target share with the acquirer at $80 implies $49.60 per target share. If the acquirer falls to $70, the implied value drops to $43.40 with no change in the deal terms.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
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