What happened

Shares of GigaCloud Technology (GCT -2.37%) are down 27.8% this week as of Thursday's close, according to data provided by S&P Global Market Intelligence, as the market jeered the business-to-business (B2B) marketplace platform's move to acquire a seemingly disparate company called Noble House Home Furnishings.

Shares of GigaCloud plunged around 25% on Tuesday alone after the company issued a press release announcing it has entered into a definitive agreement as a so-called "stalking horse" bidder to acquire substantially all the assets of Noble House for $85 million in cash. The deal was made in connection with Noble House's ongoing Chapter 11 bankruptcy proceedings.

So what

A stalking-horse bidder (in this case GigaCloud) is one that strikes an initial deal with a bankrupt company (Noble House) to acquire some or all of its distressed assets. Such deals are typically arranged to create a reserve in advance of a bankruptcy auction for those assets.

Noble House, for its part, is described as a "leading distributor, manufacturer, and retailer of an extensive selection of indoor and outdoor home furnishings," and sells its products through third-party channels at major retailers.

It's obvious, however, that investors were left scratching their heads over GigaCloud Technology's justification for acquiring a bankrupt home furnishings company.

With more than 8,000 stock-keeping units and a strong supply chain, GigaCloud believes Noble House will strengthen it direct-to-retailer business and its direct-to-consumer sales by supplementing its product range, CEO Larry Wu said. "On the other hand, we believe GigaCloud's B2B platform will enhance Noble House's operational efficiency and expand Noble House's sales channels," Wu added.

Now what

GigaCloud is solidly profitable, having generated net income of $34.3 million in the first half of 2023, based on generally accepted accounting principles (GAAP). The purchase price for Noble House isn't necessarily an issue, either, as GigaCloud had $181.5 million in unrestricted cash on its balance sheet as of June 30.

Wu also said that his company is confident GigaCloud will be able to stabilize and grow Noble House's business.

The purchase isn't a done deal just yet; the agreement is still subject to customary closing conditions, including orders being entered by the bankruptcy court. And with the stalking horse being the initial bidder, Noble House reserves the right to accept any higher and better offer it might receive during the bankruptcy auction.

But if GigaCloud emerges triumphant, it would be a relatively large deal for a company with a market cap of just under $500 million as of this writing. Even if it can turn lemons into lemonade in this case, investors would also need to grapple with the risk of purchasing the assets of a bankrupt business that requires stabilizing in the first place.

Viewed through that lens, it should come as no surprise that GigaCloud stock fell hard this week in response.