Here’s why Dena Bank shares fell 19% after Bank of Baroda share swap ratio

Merger swap ratios can unsettle stock prices because they reset the equations between shares of the entities involved. This is exactly what is playing out in the case of the Bank of Baroda (BoB) merger with Dena Bank and Vijaya Bank.

The street was concerned that BoB taking on two smaller banks could strain the large lender. Also, Dena Bank’s book is clearly not of the quality of BoB’s or even Vijaya’s. The right thing, therefore, would have been to value the stock of the bank at a discount to BoB. But, in such arrangements guided by the government, there can always be other considerations that skew the swap ratio.

Thankfully, that has not happened. The ratio clearly favors BoB and that comes as a relief to shareholders of the bank. However, this puts pressure on investors of those holding the shares of the other two banks, because these were clearly trading at a premium.