An exchange ratio is the number of acquirer shares you get for each target share in a stock merger, so what the deal is worth to you is that ratio times the acquirer's stock price, plus any cash, on the day it closes. The headline dollar figure is a snapshot from announcement day. Marvell's all-stock bid for Lumentum shows how quickly that snapshot goes stale: the "$1,132 per share" in the November 2, 2026 press release was worth about $771 by that day's close.
In a cash deal, the price is the price. In a stock deal, the price is a formula, and one input trades all session.
How the Exchange Ratio Works
Three structures come up again and again in stock and cash-and-stock deals on US and Canadian exchanges.
- Fixed exchange ratio. The share count is locked. Target holders get, say, 4.5 acquirer shares per share no matter what happens to the acquirer's stock. The number of shares is certain and the dollar value floats. Both live examples below use this structure.
- Floating exchange ratio (fixed value). The dollar value is locked and the share count adjusts. The ratio is usually set by dividing the promised value by the acquirer's average price over a measurement window shortly before closing. In a hypothetical $50-per-share deal, an acquirer averaging $40 means 1.25 shares, while an average of $50 means 1.0 share. The acquirer's holders carry the dilution risk if their stock slides.
- Collars. A collar is a compromise between the two. In one common form, the value stays fixed while the acquirer's price sits inside a band. Outside the band, the ratio freezes. Using the same hypothetical $50 value with a $45 to $55 band, the ratio can never go above 1.111 (50 ÷ 45) or below 0.909 (50 ÷ 55). Some collars are built the other way round, with a fixed ratio inside the band and a floating one outside it, so read the definitions in the proxy, not the summary.
Cash-and-stock deals just add a constant. The core formula is:
Implied deal value per target share = exchange ratio × acquirer share price + cash per share
A hypothetical offer of $10 in cash plus 0.5 acquirer shares is worth $30 with the acquirer at $40, and $27.50 with the acquirer at $35. Only the stock leg moves.
Worked Example: Marvell and Lumentum
On November 1, 2026, Lumentum ($LITE) signed a merger agreement with Marvell Technology ($MRVL). The terms are in Lumentum's Form 8-K and the joint press release filed with it. Each Lumentum common share converts into 4.500 Marvell shares, with cash in lieu of fractional shares. The press release calls it a "fixed exchange ratio." It values Lumentum at an implied enterprise value of $115 billion, about $1,132 per share, and a premium of about 23.9%, based on each company's unaffected close on October 28, 2026. Neither document describes a collar. The companies expect to close in the first half of calendar 2028, subject to both shareholder votes, regulatory approvals including the HSR waiting period, and other conditions. The outside date is November 1, 2027, with extensions possible to August 1, 2028.
Now run the formula against Nasdaq closing prices.
| Date | $MRVL close | Implied value (4.5 × $MRVL) | $LITE close | Spread (implied − $LITE) |
|---|---|---|---|---|
| October 28, 2026 (unaffected) | $251.65 | $1,132.43 | $913.95 | +$218.48 (23.9% premium) |
| November 2, 2026 | $171.41 | $771.35 | $684.40 | +$86.95 (12.7% of $LITE) |
| Illustration: $MRVL +10% from Nov. 2 close | $188.55 | $848.48 | $684.40 (held) | +$164.08 |
| Illustration: $MRVL −10% from Nov. 2 close | $154.27 | $694.21 | $684.40 (held) | +$9.81 |
The last two rows are arithmetic only. They hold Lumentum's price constant to isolate the acquirer effect, which real markets never do.
The headline number was based on a Marvell price that no longer exists. Between the October 28 and November 2, 2026 closes, Marvell fell about 31.9%, and the implied value of a Lumentum share fell by exactly the same percentage, from $1,132.43 to $771.35. That is a $361.08 haircut per share. Lumentum itself closed at $684.40 on November 2, 2026, down about 25.1% from its unaffected close.
The remaining spread of $86.95, or 12.7%, is what the market is charging for a closing that the companies themselves place more than a year out, with two shareholder votes and antitrust review still ahead. For more on the strategic case, see our coverage of Marvell's $115 billion Lumentum deal.
The Late-Stage Contrast: Transocean and Valaris
Transocean ($RIG) agreed on February 9, 2026 to acquire Valaris ($VAL) for 15.235 Transocean shares per Valaris share, all stock, with cash in lieu of fractional shares. The joint definitive proxy statement filed October 14, 2026 is blunt about it. The ratio "is fixed," and neither company's holders "will be protected against changes in the relative market prices" before completion. Both shareholder meetings are set for November 24, 2026, and the proxy anticipates completion in the second half of 2026.
| Date | $RIG close | Implied value (15.235 × $RIG) | $VAL close | Spread |
|---|---|---|---|---|
| November 2, 2026 | $6.23 | $94.91 | $94.69 | +$0.22 (0.24%) |
| Illustration: $RIG +10% | $6.85 | $104.41 | $94.69 (held) | +$9.72 |
| Illustration: $RIG −10% | $5.61 | $85.42 | $94.69 (held) | −$9.27 |
A 0.24% spread says the market treats this one as close to done. It also shows that at that stage Valaris essentially trades as 15.235 units of Transocean, so a 10% move in $RIG passes straight through. When a ratio deal nears the finish line, holding the target is mostly a bet on the acquirer. The regulatory backdrop is in our piece on the Valaris-Transocean merger moving closer.
The proxy's merger background also records how a fixed ratio drifts during negotiation. Transocean's first offer of 14.870 shares was worth about $62.90 per Valaris share at January 16, 2026 prices. By January 23, 2026, "due to trading activity," the same 14.870 ratio was worth about $71.82. The final 15.235 ratio implied about $82.12 per share at February 6, 2026 prices, a 31.6% premium to Valaris's $62.41 close that day. In each case the ratio stayed put and the price moved.
The Stock-Deal Spread and Fractional Shares
The spread in a stock deal is implied value minus the target's price, not offer price minus target price. Because the implied value moves with the acquirer, merger arbitrageurs typically buy the target and short the ratio-weighted number of acquirer shares. That isolates the spread from the acquirer's direction. A plain long position in the target carries both the deal risk and the full acquirer risk. Our companion piece on cash-deal spreads covers the simpler case where the offer is a fixed dollar amount.
Ratios rarely produce whole numbers, so the leftovers are paid in cash. Holding 101 Lumentum shares would work out to 454.5 Marvell shares under the 4.5 ratio: 454 whole shares plus cash for the half share, paid as the merger agreement specifies. At Marvell's $171.41 close on November 2, 2026, that half share would be worth about $85.71, which is illustrative arithmetic only.
The Transocean proxy describes the mechanism in detail. An exchange agent pools every fractional entitlement, rounds the pool up to a whole number, sells those shares on the NYSE and distributes the net proceeds pro rata, after commissions and costs. Holding 100 Valaris shares would come to 1,523.5 Transocean shares, which means 1,523 shares plus a cash slice from that sale. The proxy says the parties intend the deal to qualify as a tax-free reorganization for US holders, except for the cash received in lieu of fractional shares. That is a summary of the filing, not tax advice, so check with a tax professional.
Common Mistakes and a Checklist
Mistake one: treating the headline value as fixed. "$115 billion" and "$1,132 per share" were computed at October 28, 2026 prices. On a fixed ratio, those figures go stale the next morning. Headlines rarely update them.
Mistake two: forgetting the acquirer is part of your position. Owning a target under a fixed-ratio deal means owning a claim on the acquirer's stock. If Marvell's earnings, AI spending sentiment or a broad tech selloff moves $MRVL, the Lumentum deal value moves with it.
A short checklist before trading any stock-for-stock deal:
- Pull the ratio and any cash component from the 8-K or the definitive proxy, not a news story.
- Confirm whether the ratio is fixed, floating or collared, and find the measurement window if one exists.
- Recompute the implied value from the latest acquirer close and date it.
- Calculate the spread against the target's close, in dollars and in percent.
- Line the spread up against the expected close date and the outside date.
- Note the remaining hurdles: shareholder votes, HSR and other regulatory approvals, and court sanction where applicable.
The same arithmetic applies on smaller boards. See the Tactical Resources exchange ratio on the TSXV. More deal mechanics live in our Analysis section and on the What's On Finance homepage. Separate pieces in this series cover HSR timing, tender offers versus shareholder votes, and take-private structures.
Bull/Bear Verdict
Bull Case: Where exchange-ratio math helps: it turns a fuzzy headline into a number you can check every day. On November 2, 2026, the math put Lumentum's implied value at $771.35 against a $684.40 close, and Valaris at $94.91 against $94.69. That shows exactly what the market is pricing in each deal.
Bear Case: Where it misleads: the spread looks like free money until you remember the acquirer leg. An unhedged target holder in a fixed-ratio deal carries the acquirer's full volatility. As Marvell showed between October 28 and November 2, 2026, that can outweigh the entire premium.
FAQ
What is an exchange ratio in a merger?
It is the number of acquirer shares paid for each target share. Marvell's agreement with Lumentum sets it at 4.500 Marvell shares per Lumentum share. Transocean's agreement with Valaris sets it at 15.235.
Does a fixed exchange ratio mean a fixed price?
No. A fixed ratio locks the share count, not the dollar value. The value per target share equals the ratio times the acquirer's price, so it rises and falls with the acquirer's stock until closing.
What is a collar in a stock deal?
A collar sets a price band for the acquirer's stock. Inside the band, one term, usually value, stays fixed. Outside the band, the ratio stops adjusting. That limits how many shares the acquirer can be forced to issue, and also limits how far the target's protection extends.
What happens to fractional shares?
They are paid in cash. In the Transocean-Valaris deal, an exchange agent sells the pooled fractions on the NYSE and distributes the net proceeds. In the Marvell-Lumentum deal, the cash is paid as the merger agreement specifies.