According to Reuters, PayPal (PYPL, Financial) is exploring a deal to purchase social media outlet Pinterest (PINS, Financial) in a deal worth $45 billion. I find this deal very peculiar, and here's why.
Let's look at Pinterest's growth
Pinterest is a good company, and there's no denying it, but it has to be questioned whether last year's 83.55% revenue growth can be sustained or whether its 130.73% growth in levered free cash flow can be sustained.
For me, it's a case of looking at growth out of isolation. Would Pinterest have recorded the numbers it did over the last year (its first year listed on an exchange) if people weren't staying at home and interacting with social media more often due to the pandemic?
Synergies
There have been suggestions by Bloomberg Review that this deal brings great synergies because PayPal can now integrate its payment system on the platform with exclusivity. Well, an exclusive partnership is surely a better option than a multi-billion deal, isn't it?
Furthermore, PayPal isn't gaining any vertical or horizontal benefits from this deal. In a stage where digital payment competition is increasing rapidly, PayPal has chosen to perform a conglomerate type acquisition instead of adding to their competitive advantage through spending the money on buying assets that add to stronger verticals or horizontals.
Balance sheet effect
Let's look at this from a quantitative perspective. We're looking at a scenario where Paypal will be buying the company at about a $13 billion premium to enterprise value and a $5 billion premium to market value. Assets will obviously be tested for impairments, and some will be purchased at fair value, some will be purchased at market value, but roughly speaking, PayPal will be sitting with around 15% of Goodwill, which is complete deadwood.
Finally, there's a debt component. PayPal only has cash and equivalents of $5.745 billion, and this means that the deal will primarily have to be financed through debt and additional share issuance. Shareholder value will be depleted regardless, and I honestly don't know how long it will take for Pinterest to earn back the deficit.
Final word
PayPal is trading down by 2.3% year-to-date; I actually rated the stock as a solid investment prior to the acquisition announcement because I felt it underperformed due to crypto enthusiasm. Now, however, I don't know whether I'd touch the stock until we see more details on how this Pinterest deal will benefit the firm.
