Hacker News Reader

Comment by pathseeker | Hacker News Reader

>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.

View on HN

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.

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?

> 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.

That's not how equity works. Paying cash or shares, the end result is exactly the same for shareholders barring perhaps some tax implications.

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.

Not necessarily. They could just prefer to be diversified. It can be rational to take a loss of value in the pursuit of diversification (depends on the portfolios of the stakeholders).

They could also think their shares are valued accurately but believe the benefits of synthesis would increase the value.

How would any of that make payment in shares beneficial compared to cash payment?

$12B cash appears to be all they have available. They can't pay more cash.

https://www.marketwatch.com/investing/stock/nvda/financials/...

Their only other option would be taking on debt.

Right, so Nvidia with their A2 rating and their solid balance sheet in a rock bottom interest rate environment still found it favourable to purchase Arm with newly issued shares.

That's telling us something about what they think about their share valuation right now.

Perhaps there are tax implications?

That's not how interest works. "Low rate environments" are low rate because debt is less attractive than in a high rate environment. Debt isn't automatically preferable when interest rates are low - if it were, rates would rise. There's no free lunch.

All it tells you is that they think it's preferable to taking on debt, which in some sense is the position you always start from. Debt has a deadweight cost that you have to overcome.

But we can test your theory. You're saying they thought their shares were overvalued. The market's reaction was the opposite - announcing the deal bumped their share price 7.5%.

I pay the car dealer $20,000, I get a car worth $20,000. Was the car free?

actually as soon as u get the car its not a 20k$ car anymore.

Technically, yes. Your net worth is unchanged. The problem is that the car is no longer worth $20,000 as soon as you drive it off the lot.

>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.

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

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.

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).

Keep in mind that market cap is a fictional aggregate. It does not represent the real price that all shares could be sold for.

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

Reply on news.ycombinator.com