Exchange ratio determination in a market equilibrium

Purpose – The paper aims to present an exchange ratio for merging companies that incorporates the change in the level of riskiness. Design/methodology/approach – The paper is a theoretical one. Its main objective has been achieved exploiting standard modern finance results such as Capital Asset Pricing Model Capital Asset Pricing Model (CAPM). Findings – The paper offers a formula that determines a risk-adjusted exchange ratio that takes into account both risk and synergy. Research limitations/implications – Due to the fact that CAPM is applied and beta factors are required, the formula is fully applicable only to companies whose stocks are traded on a financial market. Empirical test of the exchange ratio formula (using, for instance, an event-study methodology) should be performed. Practical implications – The use of the formula allows the identification of whether the offered exchange ratio fully reflects the expected return/risk profile for stockholders of the merging companies. Originality/value – The paper should be useful in both theoretical and managerial conditions. It carries a way to embed relative riskiness of two companies into a simple formula.