Money Stuff: Zeno’s Takeover

The naive way to buy a public company is: You log into your Robinhood account, you type in the company’s ticker, and you click “buy” repeatedly until you own 51% of the company’s stock. Then you call up the company’s board of directors and say “hi, I am the new owner, I have a new business plan that I think you’ll really like, let me tell you about it.” The board looks at the stock registry and says “hmm, checks out, okay, tell us what you’d like us to do.”

This is not the normal way to buy companies. It comes up from time to time. It’s how Warren Buffett came to run Berkshire Hathaway Inc., for instance. And we talked last year about a Saudi Arabian family office that managed to buy The Children’s Place this way, in the open market. I found it weird. It’s not always easy to acquire a controlling stake in the open market, and you’ll probably pay up for it, and don’t you want to at least talk to the CEO first?

Also: What if the board says no? The board is responsible for running the company; the directors have fiduciary duties to all shareholders to run it well, but they have no direct duty to you, as the majority shareholder, to do whatever you tell them to do. If you say “I happen to own a big stash of crypto and I’d like the company to pivot to become a crypto treasury company,” they can say “no, we are in charge, and we are perfectly happy doing our actual business, buzz off.” Then what?

Well, as the majority shareholder, you can probably fire the directors and elect new ones. It might take you a while, though. How long? Depends on what the company’s charter and bylaws say. One extreme is that the charter allows removal of directors by a majority of shareholders, and allows shareholders to act by written consent: Then you can just email the directors “you’re all fired and I’m the board of directors now,” copy your lawyer, and that’s probably more or less good enough. (Not legal advice!) The other extreme is a highly protective charter prohibiting action by written consent, requiring long and onerous advance notice for director nominations, and giving directors staggered three-year terms: Then it might take you more than two years to put your own board of directors in charge of the company. But even in the best case, if you casually bought the company on Robinhood and the board says “buzz off,” you’ll probably need at least a couple of hours to consult with your lawyer before you manage to replace them. [1]

They might not want to be fired, though. What can they do in the meantime, to protect themselves? One simple yet surprising answer is: They can sell more stock. You went and bought 51% of the stock in the open market, so now you control the company. But then the company goes and sells another 20%, so your stake is down to 42.5% and you don’t control the company. They call you back and say “haha, you are not the majority owner anymore, see you at the annual meeting!” In many cases the board can sell approximately as much stock as it wants, so it can always dilute you down. [2]

Sometimes the way the board will do this is by quickly finding a friendly hedge fund to buy 20% of the stock to thwart you, [3] but in the modern world of meme stocks there is another way: If the company has an at-the-market stock offering plan in place, it can just sell stock on the exchange, to whoever wants to buy, in whatever quantities and at whatever prices people will pay for it. You can go ahead and buy some or all of this stock, if you want, but it will cost you real money. The board can print new stock for free, and your money might be more limited than its ability to issue new stock.

This is a particularly good plan for the board if:

1. You have already publicly announced your majority ownership (because you are required to by US Securities and Exchange Commission disclosure rules, or just because you wanted to), and
2. You are a crypto-y guy, and the market assumes your announcement means something like “this company will pivot to doing crypto treasury stuff, which pretty much always drives up the price.”

That is, the steps are:

1. You buy 51% of the stock cheap.
2. You announce “here I am, I own the company, let’s go.”
3. Your acquisition and activism are themselves good news for shareholders, so the stock shoots up.
4. The company sells stock into the new demand.
5. The company is like “lol not so fast, we just doubled the shares outstanding, now you own 25%.”

This is an okay trade for you (you can probably sell your stock at the high prices [4] ), and a great trade for the company (it can sell lots of stock at the new high prices, and keep you from controlling it), and also, like, a good illustration of why you don’t try to acquire companies by buying stock in the open market. You buy a majority of the stock, they sell more stock, you don’t own a majority anymore. Oh you can go and buy more, but they can go and sell more. If they do it right (and if they have more authorized shares than you have cash), they can always be one step ahead of you; you can always almost own a controlling stake but never quite get there.

On Monday morning, Robert Leshner filed a Schedule 13D disclosing that he owned 56.9% of the stock of LQR House Inc., a teeny public company ($2.8 million market capitalization as of last Friday) that sells wine and liquor through a website. (Its ticker symbol is YHC.) In the form, Leshner disclosed that he “acquired the shares for the purpose of effecting a change in the management and direction of the issuer” and intends to remove the current board and “nominate a new slate of directors who will pursue strategic alternatives.” He also tweeted about it, saying:

I bought a controlling stake in $YHC, a low market cap liquor company with a somewhat shady history.

My plan is to replace the board, and help the company explore new strategies.

I have not done extensive diligence; there are signs the company is up to no good.

I will sort them out, but please be extremely careful with any low market cap companies. I may lose all my investment and you might too.

He did not literally buy his stock on Robinhood. (He did it on Interactive Brokers.) He spent about $2.03 million buying 605,936 shares to get to 56.9%. It is perhaps relevant that Leshner’s X bio says that he is (1) the chief executive officer of Superstate, a company that “connect[s] financial assets with crypto capital markets through on-chain public listings and tokenized securities” and (2) the founder of Compound, a crypto lending protocol. There is no indication in Leshner’s tweets or 13D that he wants to turn LQR House into a crypto treasury company. I am just guessing here! That’s what I’m guessing.

But really any news is good news: If you own stock in a $2.8 million company that operates a single liquor website, [5]  news that some fancy crypto guy has taken over the company has to be exciting, whatever his plans might be. The stock closed at $2.60 per share on Friday (up from $1.98 per share on Thursday, on heavy volume, possibly because of Leshner’s buying); on Monday it opened at $3.33 and got as high as $4.94, on even heavier volume.

After the close on Monday, the company responded by announcing an at-the-market stock offering of up to $46 million of shares. On a $4.9 million market cap! [6]  Basically as many shares as the market will buy — at the high prices caused by Leshner’s purchase — LQR will sell. Yesterday about 3.5 million shares traded. I doubt LQR was the seller on all of those, or even a majority, but it was probably the seller as often as it could be. And Leshner only owned 605,936 shares at the start of the day. Does he still own a majority?

He tweeted Monday:

I’ve just seen LQR House’s prospectus supplement that was publicly filed today.

I disagree with what LQR House is doing (selling shares) with respect to the ATM offering, which I don't think is productive, and I’m consulting with lawyers.

I mean, sure, it seems quite plausible that whatever Leshner is cooking would be much better for existing LQR shareholders than whatever LQR is cooking. (LQR is an unprofitable liquor website, while Leshner is presumably cooking up a crypto pivot that will 10x the stock.) It is not particularly productive for the board to stiff-arm him. It is extremely cool and funny though. Also in a sense fair play. If you are trying to take over a public company by buying the stock on the stock exchange, why shouldn’t they just keep selling you as much stock as you can buy, without ever giving you a majority?

The great theme of modern banking is:

1. Stuff that banks used to do is now being done by non-bank financial institutions: multistrategy hedge funds, proprietary trading firms, private credit funds, etc.
2. But the banks are happy to lend them money to do the stuff.

This is sometimes called the “re-tranching” of banking: Instead of doing some activity directly, banks take the senior claim on someone else’s activity. Private credit funds lend to companies, and banks lend to those private credit funds. Hedge funds do basis trades, and banks lend to those hedge funds. 

For various reasons, banks have divisions called “trading” that both (1) do trades (also called “trading”) and (2) lend money to hedge funds to do trades (called “prime brokerage”). So the way re-tranching shows up is that prime brokerage revenue goes up relative to traditional trading revenue. Bloomberg’s William Shaw reports:

The explosive growth of prime brokerage — the business of lending hedge funds cash and securities to help execute their trades — mirrors the surge in both the number and size of hedge funds around the world. The product has been a boon for Wall Street revenues in recent years, even as the broader businesses of trading and investment banking has ebbed at times. 

A bevy of European banks are now jockeying for more of that action. …

In fact, the industry’s revenue from prime services has grown faster than any other product within equities trading over the last five years, according to data compiled by Crisil Coalition Greenwich. Income from the business hit a record $27.7 billion in 2024 and the consultancy expects that number to rise even higher this year, surpassing $30 billion for the first time.

One way to frame this story is that banks are getting safer: Instead of doing the risky trades, they are taking senior claims on the risky trades, insulating themselves from much of the risk. But there are other framings. For instance, maybe markets are getting riskier: Instead of regulated banks doing the risky trades, unregulated firms are doing the risky trades, and with alarming and poorly understood levels of leverage (provided by the banks). Shaw goes on:

The European Securities and Markets Authority has warned that hedge funds active in Europe are running bets with 18 times leverage and says there is a “risk of disproportionate reactions to unexpected events” as a result. The Bank of England, which is probing how banks measure their exposures within their prime brokerage divisions, has grown increasingly concerned about the arrival of smaller prime brokerages coming into the market. ...

“Financial history is littered with examples of firms that have entered new markets in a rather Looney Tunes style, surrounded by a cloud of dust, only to be flattened to a pancake by a large anvil marked counterparty credit risk,” Rebecca Jackson, the BOE’s executive director for authorizations, regulatory technology and international supervision, said in January.

Honestly if you run prime brokerage at a big bank and you do not have a large anvil labeled “COUNTERPARTY CREDIT RISK” on your desk right now, what are you even doing with your life?

In many parts of the financial industry, it is understood that the job is to maximize risk-adjusted returns. If you are risking a portion of your employer’s capital to earn money, you will get paid for (1) earning as much money as possible (2) with as little risk as possible. Of course those goals are in tension, but you want to be at the efficient frontier. Multistrategy hedge funds try to hire portfolio managers with good Sharpe ratios, not ones who had a lucky roll of the dice last year. 

Traditionally, the wealth management business is not like that. You’re not risking a portion of your employer’s capital to earn money; you’re just charging fees on the assets you bring in. Bringing in more assets increases the fees you can charge, but does not increase the risk of losses. The performance criterion is simpler: The more assets you bring in, the more you should get paid.

This is a traditional view, but these days it is mostly wrong. There are lots of ways for private-wealth clients to cause trouble for banks. Some do involve putting capital at risk (you lend the client money and she loses it), but some don’t. If the client is a sanctioned warlord, or Jeffrey Epstein, that is bad for the bank, even if he never asks for a loan. Paying private wealth bankers purely for bringing in more assets is incorrect. You have to pay them for their risk-adjusted assets. Bloomberg’s Noele Illien reports:

Julius Baer Group Ltd. plans to reduce the bonuses of relationship managers who generate revenue from high-risk business, as the bank seeks to introduce a new pay culture, according to people familiar with the matter. ...

The move comes as the bank’s new Chief Executive Officer Stefan Bollinger and Chairman Noel Quinn seek to reset the Swiss bank and put it on a path for growth after a string of missteps, including running up a $700 million exposure to Rene Benko’s real estate empire. ...

“We want to incentivize the RMs to focus predominantly on long-term sustainable growth and therefore we will be very focused on the quality of net new money,” he said.

In some ways bringing in scruffy billionaires who always need weird loans is the pinnacle of private banking, but it should probably get you a lower cut of the revenue than bringing in boring billionaires who just want someone to look after their money.

MicroStrategy Inc. (which now goes by “Strategy”) is a Bitcoin treasury company, which is to say it is a pot of about $70 billion of Bitcoin with stock that trades at about $138 billion. We talked yesterday about possible reasons for this 100% premium to net asset value, and I proposed three:

1. Business reasons: Strategy can do some stuff with its Bitcoins (leverage?) that makes them more valuable in its hands than it would be in your hands.
2. Market segmentation reasons: Institutional equity investors who can’t buy Bitcoin, but want to, can buy Strategy as the closest available substitute.
3. Meme reasons: Retail investors are enthusiastic.

Mostly we talked about the second reason, demand from institutional equity investors (and index funds) for crypto exposure through Strategy.

But several readers emailed me with an arguable fourth reason, [7]  which is that MicroStrategy has steadily increased its “Bitcoin per share.” Strategy’s stash of Bitcoin has grown faster than its number of shares outstanding. If you bought a share of Strategy a year ago, it represented a claim on about 0.0013 Bitcoin; if you buy a share today, it represents about 0.0019 Bitcoin. If you bought one Bitcoin a year ago, today it’s still only one Bitcoin. Therefore, buying Strategy is better than buying Bitcoin, because a share of Strategy represents a growing amount of Bitcoin, while a Bitcoin is just a Bitcoin. Therefore Strategy’s premium is justified.

This is kind of a good argument, but it is also a degenerate one. The reason that Strategy can increase its Bitcoin per share is that its stock trades at a premium, and it sells stock to buy Bitcoin. If you have 100 shares outstanding and you buy 100 Bitcoins for $1 each ($100 total net asset value, 1 Bitcoin per share), and your shares trade at $2 each ($200 total, a 100% premium), and then you sell 100 more shares at $2 each ($200 total), and then you use the money to buy 200 more Bitcoins at $1 each, then the net result is 200 shares outstanding and a pot of 300 Bitcoins, or 1.5 Bitcoins per share. And then if that pot trades at $600 ($3 per share, a 100% premium) you can do it all over again and get yourself a perpetual motion machine.

But of course this would be true even if you didn’t buy Bitcoins: What is doing the work here is the premium and the share sales, not the Bitcoin strategy. If you had 100 shares outstanding and $100 in cash ($1 per share), and for some reason your shares traded at $2 each ($200 total, a 100% premium to net asset value), and then you sold 100 more shares at $2 each, then the result would be 200 shares outstanding and a pot of $300, or $1.50 per share. And if that pot traded at $600 (a 100% premium to net asset value) then you could do it all over again and get yourself a perpetual motion machine.

That is, selling shares at a 100% premium to net asset value is of course accretive to existing shareholders. [8]  And “I will buy shares at a premium to net asset value, because the company will keep selling shares to someone else at a premium to net asset value, which will be accretive to me” is also, you know, fine, in its way.

It is dangerous logic, though. “They can sell stock at a premium, which is accretive, so they deserve a premium” is circular, and it probably can’t work forever. Eventually you run out of people to sell shares to at a premium. You need some sort of greatest-fool theory, some final people who will buy shares at a premium so that their purchases can be accretive to all the previous investors. One theory is “index funds.”

Goldman Sachs Posts Best Stock-Trading Quarter in History. Morgan Stanley Stock Traders Post Windfall on Tariff Turmoil. Bank of America Beats Estimates as Trading, Lending Revenue Outperform. Trump Executive Order to Help Open Up 401(k)s to Private Markets. Qube to Enter US After Building $30 Billion Hedge Fund Giant. Musk’s SpaceX Plans Share Sale That Would Value Company at About $400 Billion. How a British private equity firm became a $100bn tech success. Walleye, Former Trader Spar Over Hedge Fund’s Non-Compete Terms.  Hewlett Packard Enterprise Signs Pact With Activist Investor Elliott. Microsoft’s Copilot Is Getting Lapped by 900 Million ChatGPT Downloads. Apollo in talks to buy stake in Atlético Madrid. White Collar PEDs. “Etsy prohibits ‘metaphysical services,’ including spellcasting.” Grok’s new porn companion is rated for kids 12+ in the App Store.

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