A new use case for Bitcoin: Collateral for LBOs
A thought experiment for capturing corporate balance sheets
As someone who is deep within corporate America, in a role which involves capital allocation and strategy development, I think Bitcoin HODLers need to realize that the probability of mass adoption of Bitcoin as a Treasury asset at very large companies, despite the obvious success of Microstrategy doing exactly that, is minimal to non-existent. Unfortunately, Michael Saylor appears to be a one-off. Rather than use these ‘facts’ as a rationale for writing off the possibility of Treasury Bitcoin adoption, there is an alternative approach which could be a useful topic of discussion among holders of Bitcoin who may be thinking of ways to put their capital to work.
In short, there is a way to force the issue of using Bitcoin on the balance sheet, but that it involves buying large, stable companies outright and putting rules in place to require the redirection of free cash flow, dividends, and stock buybacks into buying and holding Bitcoin.
Self-custodied Bitcoin represents close to $1 trillion dollars of capital and growing. If that capital could be pooled and leveraged as collateral, that would represent significant private capital to buy out companies paying out nearly all their cash flows to current investors due to a perceived lack of good investments or due to having shareholders who demand thatfinancial strategy. The current investors of those companies are not Bitcoiners; they would be happy to be paid a one-time premium for their stakes in these large companies, based on their assumptions about future cash flows. The cash on these companies’ balance sheet could then be converted into Bitcoin. The second step would be to put in place a new rule for capital allocation that all new investments would have a hurdle rate equal to Bitcoin’s expected return (see Jesse Myers essay on Bitcoin and hurdle rates for a view of what that would mean.)The third step would be to make it clear to management that their jobs were safe, since this is the most important consideration for any corporate executive. This approach to LBOs is not about slashing and burning the business to squeeze out a percentage point of incremental profit, but about letting the balance sheet drive company value vs. the P&L/cash flows. Michael Saylor’s comments on this in his Prague keynote speech provides the guiding principles of what it means for a company to be on a ‘Bitcoin Standard’ and how that will create much more value over time than trying to increase cash flows(of course, the company should do that, but only if the investment is expected to earn a higher return on capital than merely holding Bitcoin). The fourth step would be providing all employees the chance to buy equity in the company, giving them a much larger stake in company outcomes and an opportunity to enjoy the capital appreciation that Bitcoin should drive, with Microstrategy as the obvious case study. The fifth step would be to integrate Bitcoin into the company’s product/service offerings as much as possible. For example, if the buyout target were a grocery chain, as the new owners, we could enforce the rule that the chain’s stores would accept Bitcoin payments or we could restructure the company loyalty program to be based on Bitcoin rather than a ‘points’ system, creating new Bitcoiners in the process. Of course, the options available would vary by target but almost every target would have opportunity for Bitcoin integration. The goal is to buy control of these large cash flows in order to use them to strengthen the Bitcoin network, as well as direct corporate investment dollars into the Bitcoin ecosystem.
Leveraged buyouts are considered risky so why would this work? Three main reasons stand out:
• By leaving the current management team in place (some may choose to retire rather than comply but there is always a fairly deep succession plan in place at these types of companies) this would avoid one of the most common causes of failure, which is putting in a new management team or doing major restructuring right after the transaction
• By re-directing all the company cash flows into Bitcoin, we would be putting the company balance sheet on a firmer foundation, as well as investing in Bitcoin far below what its long-term value will be. This financial strategy should enable the Bitcoin community to outbid traditional LBOfunds with ample room for long-term capital appreciation. Most LBOs are not aiming for 100X returns, whereas 100X returns are feasible with Bitcoin between now and the time Bitcoin reaches its full valuation potential.
• By leaving the current strategy more or less in place (exceptions to this being limited to a new Treasury asset allocation strategy & higher hurdle rate and the investment in Bitcoin-related integrations), confusion within the organization is minimized, enabling people to do their jobs almost as-is.
Obviously, this is just a sketch of the main points. LBOs are difficult to execute, which is why there are fewer of them now than in the past. Interest rates are higher now than they havebeen in recent decades, increasing the cost of debt. Banks may not want, initially, to lend out money collateralized with Bitcoin (even if organized into a ‘proper’ private equity firm) Those are real caveats but if the collective Bitcoin community can overcome them, the amount of cash we could direct toward Bitcoin would be quite significant, as could the opportunity to force investment into Bitcoin-related applications over investments in incremental improvements on existing technologies. Those companies out there paying out 100% of their free cash flow to investors generate vast amounts of free cash flow every quarter. Imagine those flows directed into Bitcoin to get a sense of the potential scope of the benefit to the network.