When is a floating exchange ratio typically used?

A floating exchange ratio is typically used in mergers and acquisitions when the acquirer is significantly larger than the target. This approach allows the acquirer to compensate the target's shareholders with a variable exchange ratio that fluctuates based on certain predetermined metrics, such as the stock price of the acquirer. When the acquirer is significantly larger, it often has greater leverage in negotiations and can offer a more flexible deal structure, ensuring that the target's shareholders receive a fair value that aligns with the acquirer's stock performance over time.

Utilizing a floating exchange ratio can be advantageous in volatile market conditions, as it protects both parties from substantial fluctuations in stock prices that could impact the perceived value of the transaction. This method helps to maintain a balance and fairness between the two companies involved, particularly when one company is much larger and exerting influence over the negotiation dynamics.