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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former global head of equity capital markets at Bank of America and is now a managing director at Seda Experts
Has there ever been a capital markets spectacle quite like MicroStrategy? In the last month alone, the bitcoin-buying juggernaut has announced plans to raise a staggering $42bn in equity and debt while buying $10.2bn worth of bitcoin.
On top of that, the company this month placed its fifth convertible bond issue of the year, this time raising $3bn with the jaw-dropping terms of a zero interest rate and a price to convert the debt into equity that is a 55 per cent premium to the current share price.
Technical reasons might explain part of this, with traders seeking to exploit the volatility in the underlying shares. But in effect, people are lending MicroStrategy money at no cost to the company in the hope the shares rise above the conversion price. This is despite the fact they could buy shares from the market. If that all sounds like things are getting out hand, its shareholders are not yet showing much caution. The stock has risen more than 450 per cent this year, and its market cap has rocketed to $90bn. Not too shabby for a company whose legacy software business is bleeding cash and shrinking by the quarter.
But MicroStrategy isn’t so much a software firm these days. It’s best described as an insatiable buyer of bitcoin. MicroStrategy is now the largest corporate holder of bitcoins, owning nearly 2 per cent of them, with no signs of stopping.
The $42bn capital-raising spree — half from stock sales, half from debt over three years — is part of a MicroStrategy’s “21/21 plan” unveiled last month. According to chief executive Phong Le, the plan’s name pays homage to The Hitchhiker’s Guide to the Galaxy (where “42” is the answer to life’s ultimate question), and bitcoin’s 21mn coin limit. This explanation perfectly encapsulates MicroStrategy’s mix of nerdy swagger and financial heterodoxy.
It all represents an extraordinary comeback. A quarter of a century ago, MicroStrategy was an embodiment of the dotcom bubble, with Super Bowl ads, a stratospheric stock price, and a co-founder, Michael Saylor, who made claims like: “Our software is going to become so ubiquitous, so essential, that if it stops working, there will be riots.” Then in March 2000, reality hit. MicroStrategy restated its earnings, the stock price nosedived from $333 to $0.42 eventually, and the Securities and Exchange Commission came knocking. Saylor and two colleagues later settled a case from the SEC involving hefty fines and disgorgements. The men did not admit the allegations.
Since embracing bitcoin in August 2020, the stock has skyrocketed some 28-fold. Depending on whom you ask on Wall Street, Saylor has either discovered the El Dorado of shareholder value or jerry-built a structure destined to collapse spectacularly — again.
The company’s playbook is simple. MicroStrategy sells shares and convertible bonds to buy bitcoin. The purchases help support bitcoin’s price, which lifts MicroStrategy’s stock price. Then MicroStrategy sells more shares and convertibles off the higher price to buy more bitcoin. Wash, rinse, repeat.
The current market cap of the company is $89bn while its reserve of 386,700 bitcoins is worth $37bn. The company will keep raising funds to buy more bitcoin because, as long as the stock trades at a premium to its net asset value, it is amply rewarded for doing so. The strategy differs from other companies, such as Tesla or Block, which park some excess cash from operations into bitcoin. Michael Saylor goes where Elon Musk dares not tread.
Sceptics argue the whole operation reeks of a scheme where early investors reap rewards while fresh recruits push up the stock price. The scheme hangs on two pillars: a rising bitcoin price and unrelenting investor appetite for buying MicroStrategy shares. If either wobbles, the entire edifice could crumble, potentially leaving the company saddled with maturing debt and no escape hatch.
Then there’s the legal tightrope. First, if regulators ever classified bitcoin as a security, MicroStrategy would be caught in the thicket of strict US “investment company” rules. Fortunately for Saylor, the SEC has declared bitcoin the lone exception to its stance that digital assets are securities. Second, US rules frown on company officers making speculative forecasts about stock prices. Yet Saylor has publicly predicted bitcoin will soar to $13mn by 2045. That would make MicroStrategy’s current stash of bitcoin worth a mind-blowing $4.3tn.
For now, the fevered speculation of MicroStrategy enthrals and appals Wall Street in equal measure. Yet again Saylor has produced the wildest act in capital markets.
https://www.ft.com/content/45d7c547-f686-4162-bfc3-56d609003bbb
