Unlock the Editor’s Digest free of charge
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
The author is a former world head of fairness capital markets at Financial institution of America and is now a managing director at Seda Specialists
Has there ever been a capital markets spectacle fairly like MicroStrategy? Within the final month alone, the bitcoin-buying juggernaut has introduced plans to boost a staggering $42bn in equity and debt whereas shopping for $10.2bn worth of bitcoin.
On high of that, the corporate this month positioned its fifth convertible bond challenge of the 12 months, this time elevating $3bn with the jaw-dropping phrases of a zero rate of interest and a worth to transform the debt into fairness that could be a 55 per cent premium to the present share worth.
Technical causes may clarify a part of this, with merchants in search of to use the volatility within the underlying shares. However in impact, individuals are lending MicroStrategy cash for gratis to the corporate within the hope the shares rise above the conversion worth. That is regardless of the very fact they might purchase shares from the market. If that each one appears like issues are getting out hand, its shareholders are usually not but exhibiting a lot warning. The inventory has risen greater than 450 per cent this 12 months, and its market cap has rocketed to $90bn. Not too shabby for an organization whose legacy software program enterprise is bleeding cash and shrinking by the quarter.
However MicroStrategy isn’t a lot a software program agency lately. It’s finest described as an insatiable purchaser of bitcoin. MicroStrategy is now the most important company holder of bitcoins, proudly owning almost 2 per cent of them, with no indicators of stopping.
The $42bn capital-raising spree — half from inventory gross sales, half from debt over three years — is a part of a MicroStrategy’s “21/21 plan” unveiled final month. In line with chief government Phong Le, the plan’s identify pays homage to The Hitchhiker’s Information to the Galaxy (the place “42” is the reply to life’s final query), and bitcoin’s 21mn coin restrict. This clarification completely encapsulates MicroStrategy’s mixture of nerdy swagger and monetary heterodoxy.
All of it represents a unprecedented comeback. 1 / 4 of a century in the past, MicroStrategy was an embodiment of the dotcom bubble, with Tremendous Bowl ads, a stratospheric stock price, and a co-founder, Michael Saylor, who made claims like: “Our software program goes to change into so ubiquitous, so important, that if it stops working, there can be riots.” Then in March 2000, actuality hit. MicroStrategy restated its earnings, the inventory worth nosedived from $333 to $0.42 ultimately, and the Securities and Alternate Fee got here knocking. Saylor and two colleagues later settled a case from the SEC involving hefty fines and disgorgements. The boys didn’t admit the allegations.
Since embracing bitcoin in August 2020, the inventory has skyrocketed some 28-fold. Relying on whom you ask on Wall Avenue, Saylor has both found the El Dorado of shareholder worth or jerry-built a construction destined to break down spectacularly — once more.
The corporate’s playbook is straightforward. MicroStrategy sells shares and convertible bonds to purchase bitcoin. The purchases assist help bitcoin’s worth, which lifts MicroStrategy’s inventory worth. Then MicroStrategy sells extra shares and convertibles off the upper worth to purchase extra bitcoin. Wash, rinse, repeat.
The present market cap of the corporate is $89bn whereas its reserve of 386,700 bitcoins is value $37bn. The corporate will hold elevating funds to purchase extra bitcoin as a result of, so long as the inventory trades at a premium to its internet asset worth, it’s amply rewarded for doing so. The technique differs from different firms, akin to Tesla or Block, which park some extra money from operations into bitcoin. Michael Saylor goes the place Elon Musk dares not tread.
Sceptics argue the entire operation reeks of a scheme the place early buyers reap rewards whereas recent recruits push up the inventory worth. The scheme hangs on two pillars: a rising bitcoin worth and unrelenting investor urge for food for getting MicroStrategy shares. If both wobbles, the complete edifice might crumble, doubtlessly leaving the corporate saddled with maturing debt and no escape hatch.
Then there’s the authorized tightrope. First, if regulators ever categorized bitcoin as a safety, MicroStrategy can be caught within the thicket of strict US “funding firm” guidelines. Luckily for Saylor, the SEC has declared bitcoin the lone exception to its stance that digital property are securities. Second, US guidelines frown on firm officers making speculative forecasts about inventory costs. But Saylor has publicly predicted bitcoin will soar to $13mn by 2045. That may make MicroStrategy’s present stash of bitcoin value a mind-blowing $4.3tn.
For now, the fevered hypothesis of MicroStrategy enthrals and appals Wall Avenue in equal measure. But once more Saylor has produced the wildest act in capital markets.
