Core Scientific is a slave to CoreWeave’s low float, and that low float is going up
Core Scientific can’t go up so much, so soon for perhaps the same reason that CoreWeave went up so much, so soon.
The terms of CoreWeave’s acquisition of Core Scientific — namely, that the owners of the latter will receive 0.1235 shares of the former to seal the deal — creates a funny situation.
If you assume this transaction will go through (as CoreWeave expects it will, sometime in the fourth quarter), the value of Core Scientific is now wholly dependent on the value of CoreWeave.
At the time of the announcement, that fixed ratio of “1 Core Scientific share will equal 0.1235 fractional shares of CoreWeave” implied that Core Scientific shares would be worth about $20.40, assuming no change in CoreWeave stock. But after the news hit the wires, the shares of the acquired company did not move up toward that level. They tumbled. A lot. CoreWeave fell too, though not nearly as much.
This afternoon, CoreWeave is trading at about $154.30, with Core Scientific around $14.40. Applying the fixed exchange ratio, Core Scientific “should” be trading at about $19.06. Normally, this is where you’d expect merger arbitrageurs to step in and remedy this massive discrepancy. Buy Core Scientific, short CoreWeave, and profit once the deal goes through.
Using this formula will run into this massive roadblock: the cost of borrowing shares of CoreWeave. The borrow rate is reportedly well over 100% annualized, with anecdotal reports of 300%. Once you account for that, any “free money” lying around disappears.
The borrow cost on CoreWeave is so high because a) it’s a very volatile stock that has spent most of its short history being volatile to the upside, and b) there simply is not a lot of CoreWeave to go around.
Per Bloomberg, CoreWeave’s “float” (or freely traded shares) amounts to only about 13% of its shares outstanding, because of the post-IPO lockup period that prevents the full wave of shares outstanding from coming to market, usually for a period of six months. In CoreWeave’s case, its prospectus indicates that the lockup for 84% of its shares lasts either until 180 days after the IPO, or “the close of trading on the second trading day after the date that we publicly announce earnings for the second quarter” — whichever comes sooner. CoreWeave dropped Q1 earnings on May 14, and has not yet announced the date of its next release.
The low supply of CoreWeave shares is a reason (perhaps the reason, depending on who you ask) why the stock has mooned.
The funny situation is that CoreWeave is both:
Providing an anchor for the value of Core Scientific to the upside, as its shares closed at $12.30 the session before The Wall Street Journal reported that the AI darling would make a run at acquiring the firm, while also
Preventing the full upside it’s offering via this all-stock deal from being realized in the short term, because there is seemingly no risk-free way* to do so.
Core Scientific can’t go up so much, so soon for the perhaps same reason that CoreWeave went up so much, so soon.
So in sum, Core Scientific’s management:
Hitched their wagon to CoreWeave to trade at a premium to what it otherwise would;
Created a situation where CoreWeave’s issuance of shares for this deal, all else equal, would be expected to put some downward pressure on that company’s stock and be priced in ahead of the event (and perhaps already fully has been), lowering the ultimate value they’ll be getting for selling the company;
Knows that this transaction will take place after a potentially negative catalyst for the acquiring company (the end of the IPO lockup), which may put some additional downward pressure on the shares;
And by all appearances left no practical way for shareholders or potential shareholders to arb this away for a while, when 2) and 3) may have already rendered the point somewhat moot.
“Bottom-line, using CRWV shares at $150+ as currency for an acquisition removing ~$10 billion of lease obligations, potentially makes a good deal of sense from the CoreWeave perspective,” Morgan Stanley analyst Keith Weiss wrote.
(*Heck, there is no risk-free way to do anything in merger arb land, but if you have a fancy-pants structure that you think would achieve this, my DMs are open — certainly don’t tell everyone about it first!)
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