RPT-BREAKINGVIEWS-A $9 bln AI server deal fatally mistimes the boom

By Robert Cyran

NEW YORK, Oct 21 (Reuters Breakingviews) - Manias are unpredictable things. As assumptions about the size and worth of a bounty like artificial intelligence rapidly change, the valuations of a host of companies will similarly gyrate. Trying to peg the relative value of two interdependent AI firms, several months in the future, is therefore an exercise in frustration. Just look at CoreWeave’s CRWV.O all-stock deal for supplier Core Scientific CORZ.O, once valued at $9 billion. It now seems locked into irrelevancy by a shifting market.

CoreWeave is a cloud company, renting out computing power used by the likes of OpenAI to run their chatbots. Its market value – currently $66 billion – is essentially a function of the AI boom. When demand for servers to power ChatGPT and its ilk outstrips supply, it can mint profit by offering its chips. If demand falls, or critical relationships with suppliers like Nvidia NVDA.O or customers like Microsoft MSFT.O go awry, the company’s future would be bleak.

This boom-or-bust risk is shared by supplier Core Scientific, a firm originally focused on crypto mining, which provides its would-be buyer with crucial infrastructure. Combining the two would more comfortably align their existential codependency, while eliminating over $10 billion of future lease payments the acquirer owes the seller. It’s a cost-cutting wheeze, one that should also provide over $500 million in profit-boosting annual savings.

Snag is, CoreWeave wanted to pay only in stock, and save cash for investment. Core Scientific accepted, in July, an offer valuing it at over $20 a share. Perhaps that seemed good at the time. Core Scientific had previously gone bankrupt, and the premium stood at 66% compared to its unaffected price.

Yet the deal is scheduled to close in 2025’s fourth quarter, an eternity in AI. During this period, a lock-up preventing CoreWeave insiders from selling their shares ended, leading to pressure on the stock as its largest investor, Magnetar Capital, cashed out. Companies similar to Core Scientific, meanwhile, saw their value rise. Rival firm Applied Digital’s APLD.O stock has more than tripled since July.

The result: the value of CoreWeave’s offer has slipped to around $15 a share, while Core Scientific’s stock rose to over $19.

The shareholder vote, next Thursday, seems a foregone conclusion. Proxy advisors Institutional Shareholder Services and Glass Lewis have recommended against the offer. Core Scientific’s biggest investor, Two Seas Capital, is opposed. To win the vote, CoreWeave would probably have to budge on its vow not to offer more.

If the deal crumbles, another bidder might be hard to find. CoreWeave is Core Scientific's prime customer, making it a natural suitor. Core Scientific shareholders, if they nix the deal, will probably be gambling on the company's future alone. At that point, the troublesome task of predicting AI spoils will be theirs to bear.

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CONTEXT NEWS

Institutional Shareholder Services on October 20 recommended that shareholders in Core Scientific vote against the company’s proposed sale to CoreWeave.

The cloud services company said on July 7 that it would pay 0.1235 shares for each share in digital infrastructure firm Core Scientific. That exchange ratio implied a price of more than $20 per share on the day of the announcement. Using closing prices on October 20, the offer would instead be worth $15.69. Core Scientific’s stock ended the day at $18.81.

Shareholder Two Seas Capital, which owns 6.3% of Core Scientific and is the company’s largest active shareholder, came out against the deal on August 7.