Currency for Acquisitions: How Stock-for-Stock Deals Work
When a company goes public, it doesn’t just gain access to capital through selling shares—it gains something even more versatile: publicly traded stock as a strategic currency.
This stock can be used to fund acquisitions, enabling companies to grow faster, enter new markets, or acquire key technology and talent without always paying in cash. One of the most common ways this happens is through what’s called a stock-for-stock acquisition or equity-based acquisition.
In this article, we’ll break down how stock-for-stock acquisitions work, why they’re valuable, and share some real-world examples.
How Stock-for-Stock Acquisitions Work
In a stock-for-stock acquisition, the acquiring company offers shares of its own publicly traded stock as payment to buy another company—either instead of, or in addition to, cash.
How the Process Works:
A public company identifies a target for acquisition (often a private company or a smaller public company).
Instead of offering cash, the acquiring company proposes to pay using its own shares.
The target company’s shareholders agree to receive shares of the acquirer, effectively becoming shareholders in the combined company.
The deal closes, and ownership of the target company is transferred in exchange for equity.
Result:
The acquired company’s founders, employees, and investors now hold shares in the acquiring company, aligning their future success with the growth of the new, larger business.
Why Stock-for-Stock Acquisitions Are Valuable
1. Preserves Cash
Rather than depleting cash reserves (which might be needed for operations, R&D, or debt payments), the acquirer can use stock to fund the acquisition.
2. Attractive to Sellers
If the acquired company’s owners believe in the growth potential of the acquirer, they may prefer stock over cash—especially if they anticipate the stock price will rise.
3. Enables Larger Deals
Publicly traded shares can support larger acquisitions than what might be possible with cash alone, particularly for high-growth companies with strong market valuations.
4. Aligns Interests
By paying in stock, the acquirer can incentivize the leadership team of the acquired company to stay onboard and work toward the success of the merged entity, since their upside is tied to share performance.
Real-World Example: Facebook & Instagram
One of the most famous examples of stock-for-stock acquisition strategy is Facebook’s acquisition of Instagram in 2012.
Deal Value: Approximately $1 billion
Structure: A significant portion of the deal was paid in Facebook stock, not just cash.
Rationale:
Preserved Facebook’s cash reserves.
Gave Instagram’s founders and investors a stake in Facebook’s future success.
Aligned incentives, as Instagram’s leadership was motivated to help the combined platform thrive.
This approach helped Facebook secure a key growth engine (Instagram) at a time when its own IPO was on the horizon.
Other Notable Stock-for-Stock Deals
AcquirerTargetDeal ValueStructureFacebookInstagram$1 billionCash and stockSalesforceSlack$27.7 billionPrimarily stockMicrosoftLinkedIn$26.2 billionMostly cash, but stock options used to retain talentSquare (now Block)Afterpay$29 billionAll-stock transaction
These examples highlight how stock-for-stock deals are used not only for small acquisitions but also for mega-mergers and strategic plays.
Considerations and Risks of Stock-for-Stock Acquisitions
While stock-for-stock acquisitions can offer flexibility, they also come with considerations:
Shareholder Dilution:
Issuing new shares to fund an acquisition dilutes the ownership of existing shareholders.
Valuation Volatility:
The value of the payment depends on the acquirer’s stock price. If the stock price falls between the agreement and the closing date, the deal's value could shrink.
Market Reaction:
If investors believe the acquisition is too expensive or strategic fit is poor, the acquiring company’s stock price may drop—impacting the overall deal.
Key Takeaway
Going public isn’t just about raising capital—it’s about unlocking strategic flexibility. Public shares become a form of currency that can be used to fund acquisitions, incentivize partners, and support growth initiatives without always relying on cash.
In competitive markets, this ability to offer stock as part of a deal package can mean the difference between closing an acquisition or losing out to another bidder.