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>Also, to first order, when a company issues stock to purchase another corporation, that cost is essentially "free" since the value of the corporation increases

>Also, to first order, when a company issues stock to purchase another corporation, that cost is essentially "free" since the value of the corporation increases. This isn't correct. If investors thing Nvidia overpaid, its share price will decline. There are many examples of acquiring companies losing significant value on announcements to buy other companies even in pure stock deals.

smabie 6y ago
It's rare for the acquiring companies stock to not decline, regardless of whether the market thinks they overpaid.
- inlined 6y ago
  I worked at Parse when it was bought by Facebook. The day the news broke, Facebook’s market cap grew by multiples of the acquisition price. I remember being gobsmacked that Facebook effectively got paid to buy us.
  - rocqua 6y ago
    Unless Facebook itself actually issued stock at the new price, Facebook did not get paid. It were the Facebook shareholders that got paid. Really, it shows that the market valued Parse much more than the cash it cost Facebook. If Parse was bought with stock instead of cash, that's almost cooler. Since it allowed Parse to capture more of the surplus value they created. (Since the stock price popped).
  - jannes 6y ago
    Keep in mind that market cap is a fictional aggregate. It does not represent the real price that all shares could be sold for.
  - smabie 6y ago
    More sophisticated analysis is required. You should look at the beta of Facebook at the time and determine whether the market reacted positively to the acquisition, or if the move was inline with Facebook's exposure to the market
siberianbear 6y ago
In addition, it's not even a valid argument if the cost was entirely in cash. One would be making the argument, "the cost is essentially free because although we spent $40B, we acquired a company worth $40B". Obviously, that's not any more correct than the case of paying in stock.
- HenryBemis 6y ago
  Correct, if it's shares, they just dilluted the value of the stock. If I owned 1% of the company, after printing and handing out $40bn worth of stock, then I keep the same amount of stock, but now it's (e.g.) 0.5%, which means I just lost 50% of that investment. Which means I will receive 50% of the dividend (since out of the next year's dividend 'pool' someone will get a big chunk. Which means NVidia just screwed the existing shareholders (for the time being, and once the numbers/$ are merged I should be getting my dividend by two parts, one from ARM and one from NVIDIA). If they gave away cash, that's a different story, it all depends.. if they were sitting on $1tn cash, and the spent $40bn, that's no biggie. I mean we went through COVID, what worse can come next?
  - kd5bjo 6y ago
    > If I owned 1% of the company, after printing and handing out $40bn worth of stock, then I keep the same amount of stock, but now it's (e.g.) 0.5%, which means I just lost 50% of that investment. Which means I will receive 50% of the dividend Well, you’re now getting 50% of the dividend produced by the new combined entity. If the deal was correctly priced, your share of the Arm dividend should exactly replace the portion of your Nvidia dividend that you lost through dilution.
  - throwaway5792 6y ago
    That's not how equity works. Paying cash or shares, the end result is exactly the same for shareholders barring perhaps some tax implications.
- fauigerzigerk 6y ago
  I agree that paying in new shares doesn't make the acquisition free. But the value of shares is an expectation of future cash flows. If that expectation is currently on the high side for Nvidia and on the low side for Arm then paying in shares makes the acquisition cheaper for Nvidia than paying cash. Nvidia is essentially telling us that they think their shares are currently richly valued. I agree with that.
delfinom 6y ago
>If investors thing Nvidia overpaid, its share price will decline You realize that logic no longer matters in this economy. There's an oversupply of printed money and stonks literally only going up.

smabie 6y ago

It's rare for the acquiring companies stock to not decline, regardless of whether the market thinks they overpaid.

inlined 6y ago
I worked at Parse when it was bought by Facebook. The day the news broke, Facebook’s market cap grew by multiples of the acquisition price. I remember being gobsmacked that Facebook effectively got paid to buy us.
- rocqua 6y ago
  Unless Facebook itself actually issued stock at the new price, Facebook did not get paid. It were the Facebook shareholders that got paid. Really, it shows that the market valued Parse much more than the cash it cost Facebook. If Parse was bought with stock instead of cash, that's almost cooler. Since it allowed Parse to capture more of the surplus value they created. (Since the stock price popped).
- jannes 6y ago
  Keep in mind that market cap is a fictional aggregate. It does not represent the real price that all shares could be sold for.
- smabie 6y ago
  More sophisticated analysis is required. You should look at the beta of Facebook at the time and determine whether the market reacted positively to the acquisition, or if the move was inline with Facebook's exposure to the market

siberianbear 6y ago

In addition, it's not even a valid argument if the cost was entirely in cash. One would be making the argument, "the cost is essentially free because although we spent $40B, we acquired a company worth $40B". Obviously, that's not any more correct than the case of paying in stock.

HenryBemis 6y ago
Correct, if it's shares, they just dilluted the value of the stock. If I owned 1% of the company, after printing and handing out $40bn worth of stock, then I keep the same amount of stock, but now it's (e.g.) 0.5%, which means I just lost 50% of that investment. Which means I will receive 50% of the dividend (since out of the next year's dividend 'pool' someone will get a big chunk. Which means NVidia just screwed the existing shareholders (for the time being, and once the numbers/$ are merged I should be getting my dividend by two parts, one from ARM and one from NVIDIA). If they gave away cash, that's a different story, it all depends.. if they were sitting on $1tn cash, and the spent $40bn, that's no biggie. I mean we went through COVID, what worse can come next?
- kd5bjo 6y ago
  > If I owned 1% of the company, after printing and handing out $40bn worth of stock, then I keep the same amount of stock, but now it's (e.g.) 0.5%, which means I just lost 50% of that investment. Which means I will receive 50% of the dividend Well, you’re now getting 50% of the dividend produced by the new combined entity. If the deal was correctly priced, your share of the Arm dividend should exactly replace the portion of your Nvidia dividend that you lost through dilution.
- throwaway5792 6y ago
  That's not how equity works. Paying cash or shares, the end result is exactly the same for shareholders barring perhaps some tax implications.
fauigerzigerk 6y ago
I agree that paying in new shares doesn't make the acquisition free. But the value of shares is an expectation of future cash flows. If that expectation is currently on the high side for Nvidia and on the low side for Arm then paying in shares makes the acquisition cheaper for Nvidia than paying cash. Nvidia is essentially telling us that they think their shares are currently richly valued. I agree with that.

delfinom 6y ago

>If investors thing Nvidia overpaid, its share price will decline You realize that logic no longer matters in this economy. There's an oversupply of printed money and stonks literally only going up.