How All-Stock Mergers Work: Exchange Ratios, Deal Spreads and Why a $1,132 Headline Price Can Be Worth $771

In a stock-for-stock deal, the price in the headline is only a snapshot. Here is how to work out what a deal is worth today, using a real example.

What is an all-stock merger?

An all-stock merger is a deal where the buyer pays with its own shares instead of cash. Each share of the target company converts into a set number of the buyer's shares, called the exchange ratio. Because the buyer's stock keeps moving, the deal's dollar value can change every day.

Companies often choose stock for a simple reason: a very large deal may be hard to pay for in cash. Paying in shares avoids taking on as much debt, and it lets the target's owners share in the future of the combined company. The trade-off is that the buyer's existing shareholders end up owning a smaller slice, and the target's shareholders take on the risk of the buyer's stock price.

A real example makes this easier to follow. On Nov. 2, 2026, Marvell Technology agreed to buy Lumentum, a maker of optical parts used in data centers, in an all-stock deal with an implied enterprise value of $115 billion. Enterprise value counts the company's stock value and its debt, minus its cash, so it's a broader measure than the share price alone. We'll use this deal throughout, because it shows nearly every moving part. The numbers are a snapshot from that date, and the lessons apply to any stock-for-stock merger.

How does an exchange ratio work?

The exchange ratio tells you how many buyer shares you get for each share you own. In this deal, the merger filing says each Lumentum share converts into 4.500 Marvell shares, with cash paid instead of fractional shares.

So the math is simple. If you owned 100 Lumentum shares, you would receive 450 Marvell shares. If you owned 15 Lumentum shares, 4.5 times 15 is 67.5, so you would get 67 shares plus cash for the half share.

There are two main kinds of ratio. A fixed exchange ratio, like this one, sets the number of shares and lets the dollar value float. A fixed value deal sets the dollar amount and changes the number of shares to match, usually within limits. With a fixed ratio, the target's shareholders carry the risk that the buyer's stock falls before closing, and they also get the benefit if it rises. As Investing.com's report on B. Riley's note put it, Lumentum holders "carry Marvell share-price risk until the transaction closes."

Why was the headline price so far from reality?

The headline said about $1,132 a share, a 23.9% premium. A premium is the extra amount a buyer offers above the target's recent market price. Both figures used closing prices from Oct. 28, which the companies described as the last trading day before market speculation about a deal began. AskTraders reported that Marvell closed that day at $251.65 and Lumentum at $913.95. Check the arithmetic: 4.5 times $251.65 is about $1,132, and that is 23.9% above $913.95.

But Marvell's stock didn't stay there. It had already dropped to $196.40 by Friday, Oct. 30. After the announcement it fell another 12.7% to close at $171.41 on Nov. 2. Lumentum fell 18.6% to $684.40.

Now run the same math with Monday's price: 4.5 times $171.41 is about $771. That is roughly 32% below the $1,132 headline, and it's also below Lumentum's Friday close of $840.70. In other words, the "premium" in the press release had vanished by the end of the first day. Nothing in the agreement changed. The buyer's share price did.

This is the most useful habit an investor can take from an all-stock deal. Ignore the headline dollar figure and multiply the exchange ratio by the buyer's current share price. Here's how that value moves with a fixed ratio, using Marvell's Nov. 2 close as the starting point:

• If Marvell rose 10% to about $188.55, each Lumentum share would be worth about $848.
• If Marvell stayed at $171.41, each Lumentum share would be worth about $771.
• If Marvell fell 10% to about $154.27, each Lumentum share would be worth about $694.

What is a deal spread, and what does it tell you?

If a Lumentum share converts into about $771 of Marvell stock, why did it close at just $684.40? That difference is called the deal spread, and here it was about $87, or roughly 12.7% of Lumentum's price.

A spread is the market's way of pricing time and risk. Holders may wait a long time, because the companies expect to close in the first half of 2028. The deal may also fail. Shareholders of both companies must approve it, and it needs antitrust and other regulatory clearance, according to the filing. If it falls apart, the target's stock could move sharply.

A rough check shows how the market is thinking. A 12.7% gain spread over about 18 months works out to about 8.5% a year in simple terms, ignoring dividends. For comparison, the 10-year Treasury yield was about 4.9% on Nov. 2. A wider gap suggests investors see real uncertainty, and that view shows up elsewhere: The Daily Upside, via Yahoo Finance, reported that Morningstar put the odds of the deal closing "somewhere below 50%." Others were more upbeat. Investing.com reported that Raymond James called the market reaction "overdone," while B. Riley and Stifel downgraded Lumentum.

Some professional traders try to earn that gap by buying the target and shorting the buyer, a strategy called merger arbitrage. Shorting means betting a stock will fall. It carries real risk, because a broken deal can erase the gain and more. For most long-term investors, the spread is more useful as a signal than as a trade.

Why can both stocks fall when a deal is announced?

Normally the target rises toward the offer and the buyer slips a bit. On Nov. 2, 2026, both fell sharply. A few forces can drive that.

Dilution. The buyer issues new shares, so each existing share owns a smaller piece. After this deal, Marvell holders would own about 67% and Lumentum holders about 33% of the combined company on a fully diluted basis. If you owned 1% of Marvell, you'd own about 0.67% after closing. Dilution isn't automatically bad, since you'd own part of a bigger business, but the combined company must earn enough to justify it. Our story on IonQ's all-stock deal shows a smaller version of the same worry.

Price paid. Investors may think the buyer is paying too much, especially after a big run. Yahoo Finance reported that Marvell had been up more than 130% for the year and Lumentum 128%. Companies usually answer by pointing to cost savings, known as synergies. Marvell projected more than $1 billion a year and said the deal should add to adjusted earnings per share in the first year after closing. Those are forecasts, not promises.

The value link. Because the target's price is tied to the buyer's stock, a falling buyer pulls the target down with it. The fixed ratio makes the two stocks move together more than they did before.

Market mood. Big deals don't land in a vacuum. Technology stocks were already under pressure that day. The market wrap for Nov. 2 shows the Nasdaq down about 1%.

It's also worth knowing that the target's own news can get lost. Lumentum reported the same day that adjusted earnings per share rose to $4.57, above the roughly $4.21 analysts expected, and it forecast next-quarter revenue of $1.575 billion to $1.625 billion, well above the $1.48 billion consensus, Investing.com reported. The stock still fell, because the deal now drives its price.

What happens if the deal falls apart?

Merger agreements include break-up terms, often called termination fees. These set out who pays whom if the deal ends in certain ways. In this deal, the filing says Marvell would pay Lumentum $5.8 billion, or Lumentum would pay Marvell $2.9 billion, in certain cases such as a board changing its recommendation for a better offer. Marvell would pay a separate $3.2 billion regulatory fee if the deal fails on specified antitrust or regulatory grounds.

Agreements also set an outside date, the deadline after which either side may walk away. Here it's Nov. 1, 2027, and it can be extended in steps to Aug. 1, 2028, if regulatory approvals are the holdup. Long timelines are common in very large deals that need approval from several governments.

If a merger fails, the target usually loses its deal support and the buyer may rebound, though every case is different. The fee softens the blow for the company that receives it, but it doesn't guarantee that shareholders get back to where they were.

How can an ordinary investor read an all-stock deal?

You don't need a finance degree. Four questions cover most of it, and the answers are in the merger filings and the proxy statement, the document sent to shareholders before a vote. Larger deals also file a registration statement, called a Form S-4, which explains the terms and the tax treatment.

First, what's the ratio, and is it fixed? Second, what's it worth today? Multiply the ratio by the buyer's latest price instead of trusting the headline. Third, how wide is the spread, and how long until closing? Fourth, who owns what afterward, and what must go right to justify the price? If you hold a broad, diversified mix of funds, one merger usually has a limited effect. If you hold either stock directly, you may want to read the proxy before any vote, since your shares can be voted on the deal.