AI Firms Pursuing Acquisitions with Expensive Shares... WSJ Warns of Overheating Signal
Recently, companies whose stock prices have surged amid the artificial intelligence (AI) boom are increasingly using their own shares as ammunition for mergers and acquisitions (M&A). The Wall Street Journal (WSJ) warned on the 21st (local time) that this trend is a sign of an overheated stock market.
The WSJ cited SpaceX, the space company led by CEO Elon Musk, as a prominent example. On June 16, the company announced a merger with Anthropic, the developer of the AI coding app 'Cursor,' through a $60 billion stock-swap deal. This announcement came just four days after SpaceX made its debut on the stock market through the largest initial public offering (IPO) in history.
Companies can raise funds for investments or M&A either by increasing their debt or by issuing new shares. Especially when stock valuations are high, issuing additional shares allows companies to secure substantial capital with only a small portion of equity. However, the WSJ pointed out that if companies collectively issue new shares to raise funds, it is a signal that stocks are overvalued.
During the dot-com bubble and following the COVID-19 pandemic, when the special purpose acquisition company (SPAC) boom occurred, rising stock valuations led to a wave of IPOs and secondary stock offerings. According to LSEG data, two-thirds of M&A funds during the dot-com bubble and 45% of such funds in 2020–2021 were raised through new share issuances.
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The WSJ expressed concern that, while the enormous opportunities presented by AI could absorb all available funds and still generate profits, it is also possible that companies are simply spending massive amounts of money fueled by shareholders' enthusiasm. The report specifically warned that, during the dot-com bubble, companies competed to spend as much money as possible, and even the 'burn rate'—the speed at which cash was consumed—was regarded as a metric of growth.
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