What Can We Learn from Amazon’s Stock Split?
Skip to content
Finance & Accounting Mar 17, 2022

What Can We Learn from Amazon’s Stock Split?

We may have to wait and see what this move signals for the tech sector.

A package delivery person arrives.

Michael Meier

Recently, Amazon announced a 20-for-1 stock split, meaning its investors will receive 20 shares for each share they currently own. The news sent Amazon’s stock price soaring by 5.5 percent.

A stock split is a cosmetic change: it merely breaks each share into smaller pieces without affecting its fundamental value. But nevertheless, stock prices tend to react positively to the announcement of a split, as investors accept the common argument that lower prices make the individual shares more attractive and accessible to smaller retail investors. But in this case, there is potentially an ulterior motive behind the split. There is a good chance that Amazon is bracing itself for some major mergers and acquisitions.

When firms acquire other firms, they can pay for the acquisition by either using cash or by offering to pay the seller with the acquirer’s stock. The main advantage of a stock-for-stock acquisition is that the acquirer does not need to put down its own cash or raise external funding to pay for the acquisition. And how is this connected to Amazon’s stock split? Well, it turns out that firms are more likely to pursue a stock-for-stock acquisition after they have split their shares.

The reason for the confluence between stock splits and stock-for-stock acquisitions is very simple. A rise in the acquiring firm’s stock price makes stock-for-stock acquisitions more attractive because it raises the value of its “currency”—that is, its stock price. That’s right: despite the fact that they are largely cosmetic, stock splits tend to raise stock prices!

Here are two telling examples.

  1. On November 4th, 1999, in what is still the largest M&A deal in the pharmaceutical industry, Pfizer announced that it would pay over $90 billion to acquire Warner-Lambert, which had just launched the blockbuster drug Lipitor. This was a stock-for-stock merger in which Pfizer exchanged 2.75 of its common stock for each outstanding share of Warner-Lambert stock. But prior to the acquisition, in July 1999, Pfizer announced a three-for-one split.
  2. AOL executed a two-for-one stock split on March 17, 1998, followed by another two-for-one split on November 18 of that year, before going on to acquire Netscape for $4.2 billion. Next, it executed two more two-for-one stock splits in 1999 before announcing the acquisition of Time Warner for $164 billion.

Stock-for-stock acquisitions have become particularly popular in the technology sector.

Stock-for-stock acquisitions have become particularly popular in the technology sector. In 2020, 39.5 percent of all deals used stock to pay for the acquisition, but among technology companies, the share of stock-for-stock acquisitions is around 50 percent.

The largest technology deals in 2020 almost exclusively used stock-for-stock, including AMD’s acquisition of Xilinx Inc for $35 billion and Salesforce’s acquisition of Slack technologies for $27.7 billion.

Amazon is not alone in splitting its shares. Just a month ago, Alphabet announced a 20-for-1 stock split that will become effective in July. Does this mean we will see some major acquisitions in the technology sector in the near future?

Both stock splits and stock-for-stock acquisitions tend to follow soaring stock prices. Valuation of technology companies took a hit recently, but they have appreciated so much during the rally in technology stocks over the last two years that they are still historically high. So if history is to repeat itself, we should brace ourselves for a mergers-and-acquisitions cycle in the technology sector.

But it is also possible that this split signals a very different scenario—that technology firms have reached their peak and are likely to decline. Amazon’s last split before the one that was announced yesterday was in September 1999, just a few months before the bursting of the dot-com bubble. And Yahoo! completed a two-for-one split in February 2000, just a few weeks before the burst of the bubble.

So, we must wait and see. A cluster of stock splits by major technology companies is not generally a random occurrence. Time will tell whether it signals an active M&A cycle or something much more ominous.

*

This article originally appeared in Forbes.

Featured Faculty

Henry Bullock Professor of Finance & Real Estate; Director of the Guthrie Center for Real Estate Research; Director of the Crown Family Israel Center for Innovation

Most Popular This Week
  1. One Key to a Happy Marriage? A Joint Bank Account.
    Merging finances helps newlyweds align their financial goals and avoid scorekeeping.
    married couple standing at bank teller's window
  2. Take 5: Yikes! When Unintended Consequences Strike
    Good intentions don’t always mean good results. Here’s why humility, and a lot of monitoring, are so important when making big changes.
    People pass an e-cigarette billboard
  3. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  4. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  5. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  6. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  7. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  8. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. The Appeal of Handmade in an Era of Automation
    This excerpt from the book “The Power of Human" explains why we continue to equate human effort with value.
    person, robot, and elephant make still life drawing.
  11. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  12. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  13. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  14. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  15. How the Wormhole Decade (2000–2010) Changed the World
    Five implications no one can afford to ignore.
    The rise of the internet resulted in a global culture shift that changed the world.
  16. What’s at Stake in the Debt-Ceiling Standoff?
    Defaulting would be an unmitigated disaster, quickly felt by ordinary Americans.
    two groups of politicians negotiate while dangling upside down from the ceiling of a room
  17. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  18. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  19. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  20. 3 Traits of Successful Market-Creating Entrepreneurs
    Creating a market isn’t for the faint of heart. But a dose of humility can go a long way.
    man standing on hilltop overlooking city
More in Finance & Accounting