Guide · Markets
All-Stock Mergers: Exchange Ratios and Deal Spreads
In an all-stock merger the target's holders receive a fixed number of the buyer's shares, so the offer's value moves with the buyer's price. Here is how exchange ratios, premiums and deal spreads work, using Marvell's November 2026 deal for Lumentum.
Before the US open on Monday, November 2, 2026, Marvell Technology agreed to buy Lumentum, the optical-components maker, for 4.500 Marvell shares per Lumentum share. The companies valued the offer at about $1,132 a share, a 23.9% premium, and the whole deal at an implied enterprise value of $115 billion. By the close, Marvell had fallen 12.72% to $171.41, which made 4.5 of its shares worth $771.35, and Lumentum had fallen 18.59% to $684.40, 12.7% below even that. Both numbers, the headline value and the discount, come straight from how all-stock deals work.
In an all-stock merger the buyer pays with its own newly issued shares instead of cash. The terms are set as an exchange ratio: how many buyer shares each target share becomes. Most ratios, Marvell's included, are fixed, so the number of shares is certain and their value is not; if the buyer's stock falls, the offer is worth less. Some deals use a floating ratio, which fixes the dollar value and adjusts the number of shares, or a collar, which keeps the ratio fixed only while the buyer's price stays inside a band. Holders of the target end up owning part of the combined company, here about 33%, against 67% for Marvell's existing holders.
The premium is measured against the unaffected price, the last close before news or rumours of the deal reached the market. For Marvell and Lumentum that was October 28, when Marvell closed at $251.65; 4.5 times $251.65 is the $1,132 in the headline. By the time the deal was announced Marvell had already fallen to $196.40 in a chip sell-off, so the headline described a value that no longer existed on the day it was published. Reading an all-stock offer always means recomputing it at today's price.
The deal spread is the gap between the offer's current value and the target's price, usually shown as a percentage of the target's price: ($771.35 − $684.40) ÷ $684.40 = 12.7%. It exists because a deal is a promise, not a payment. The buyer's and target's shareholders must vote, competition authorities in several countries must approve, and the buyer can walk away in defined circumstances. The agreement filed with the SEC set an outside date of November 1, 2027, extendable to August 1, 2028, and a $3.2 billion fee Marvell would pay if regulators block the deal. The companies expect to close in the first half of 2028, so the 12.7% is earned over about 19 months, roughly 8% a year if everything goes to plan.
Merger arbitrage is the trade that lives on that spread. An arbitrageur buys the target and, in an all-stock deal, sells short the buyer in the ratio, here 4.5 Marvell shares for each Lumentum share bought. The hedge removes most of the exposure to Marvell's price, so the position earns the spread if the deal closes and loses heavily if it breaks, when the target usually falls back toward its unaffected price. That asymmetry, small gains with a long wait against a large, sudden loss, is why spreads widen when markets fall: arbitrage funds cut risk at the same time, and wider spreads can reflect forced selling rather than a higher chance of failure.
When an all-stock deal is announced, run four checks. Recompute the offer at the buyer's current price rather than trusting the headline. Calculate the spread and annualise it to the expected closing date. Read the risks the agreement itself prices, such as the regulatory termination fee and the outside date. And remember that until closing, the target trades as a copy of the buyer at a discount: if you own it, you are now mainly exposed to the buyer's shares, which is why Lumentum fell more than Marvell on the day it was bought.