Banking Terms - Set 5 (Cash & Stock Merger, Mandatory Exchange, Name Change, Mandatory Conversion)

Mandatory Conversion

This is a kind of Corporate Action in which convertible assets are considered. Here, such kind of assets is converted into another form at a predetermined price at a specified date.

E.g. Company A has announced Mandatory Conversion for its Convertible bonds, like each convertible bond of value $100 will be receiving 10 shares of the Company. A person holding bonds worth $10000 of Company A will then be receiving 1000 shares when this conversion is being executed. Usually, the conversion ratio [i.e. In what proportion the bonds will be converted] is fixed at the time of issuing the convertible security.

Name Change

A corporate action in which a company/entity has announced a change in its corporate name, say after a merger/acquisition, when two companies become one - they have to adopt one of the old names (or) a new name such a kind of action is termed as Name Change. The underlying security name also changes with no change in the value.

E.g. Company A & Company B has been merged and they have decided to rename the new entity/corporation as "C".

Mandatory Exchange

It is a kind of Corporate Action, in which one company's securities are exchanged for other company. This Corporate Action is a mandated one and shareholders have to exchange their shares.

E.g. Company A has decided to exchange its shares with Company B's. So, the shareholders of Company A, will be receiving shares of Company B at a specified rate by the Company A.

Cash & Stock Merger

Merger is a Corporate Action, in which two (or) more entities are collaborated as a means to help in rapid growth. In this type of Merger, the shareholders of the firm that is being acquired will be paid with cash (and) stock of the new entity that is being formed.

E.g. Company A has a market value of $1M with the stocks accounting to 500,000, hence the stock price will be $2 each, whereas the market value of the same is at $3. Now, company B (whose market value is also at $3) has decided to acquire company A by distributing its (Company B) shares to the A’s Shareholders and the payment will be like 50% holdings and 50 % Cash. Now, a holder who holds Company A’s 100 shares will get 50 shares of company B and $150. 

Stock Merger

Merger is a Corporate Action, in which two (or) more entities are collaborated as a means to facilitate rapid growth. Now, in Stock Merger, the acquiring firm buys the target firm’s stock by issuing its own stock. Usually, in this kind of Merger, Payment will be in the form of acquiring company's stock issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

E.g. Company A has a market value of $1M with the stocks accounting to 500,000, hence the stock price will be $2 each, whereas the market value of the same is at $3.Now, company B (whose market value is at $6) has decided to acquire company A by distributing its (Company B) shares to the A’s Shareholders at a ratio of 2:1. Now, a holder who holds Company A’s 100 shares will get 50 shares of company B’s share.