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Roula Khalaf, Editor of the FT, shares her favorite stories in this weekly newsletter.
They’re at it again. MicroStrategy Incorporated, also known as Strategy, has unveiled a new financial instrument aimed at raising funds to acquire more bitcoin. This offering is dubbed Series A Perpetual Strife Preferred Stock.
The term “Strife” raised eyebrows; initially, Matt Levine from Bloomberg thought it was a typo. However, it appears 23 mentions in the document confirm it is intentional. It might be an inside joke or a candid acknowledgment of the company’s ongoing tumultuous bitcoin acquisition strategy.
The name isn’t the only unusual aspect. Strife distinguishes itself from previous funding methods utilized by Strategy. Unlike the perpetual strike preferred securities (STRK), this offering cannot be converted into common stock. Executive Chair Michael Saylor sees it as a method to attract fixed-income investors, although Strife does not align with their usual desire for stability and consistent returns. Instead, it exposes investors to bitcoin’s potential downturn without granting them the benefits of price surges in the cryptocurrency.
The dividend arrangement further complicates matters. In contrast to the STRK, which allows dividends to be distributed in cash or stock, the Strife dividends are only cash-based, offering a 10 percent annual return. There’s a stipulation that if the company defers payments, the rate increases by one percent annually, up to a cap of 18 percent.
Importantly, the fine print includes a striking detail: the company’s board can completely halt dividend payments, creating a significant risk for investors. They are essentially asked to invest based on trust alone, despite the possibility of reduced payouts or declining value.
As for the source of cash to fund these dividends, MicroStrategy currently has less than $50 million available, and its traditional software business is underperforming. To meet the 10 percent yield obligation on $500 million of preferred stock, the company plans to raise capital through selling additional stock or other dilutive securities, rather than from operational earnings.
Despite the risks and potential for significant dilution, Strategy has secured a notable lineup of underwriters, including Morgan Stanley and Citigroup, hinting at either investor enthusiasm for Saylor’s bitcoin-centric approach or a simple appreciation for the associated fees. The Strife preferred stock represents an intriguing yet perplexing addition to Strategy’s strategy, characterized by an unclear return profile and significant dilution for common shareholders. Given the company’s heavy investment in cryptocurrency, the name “Perpetual Strife” may very well capture the inevitable uncertainties of staking a fortune on bitcoin.
Further Reading:
– If bitcoin is the future, what explains MicroStrategy’s need for speed?
– MicroStrategy’s secret sauce is volatility, not bitcoin
– Examining MicroStrategy’s record-shattering $21bn ATM
– Strategy: buy higher, pump harder
