Building castles in the sky, one new share at a time

Also: Lloyd's of London, Palantir, Ultimate Fighting Championship, Kevin Warsh, and Conan the Barbarian

Given the number of words he delivers each week, it should be no surprise to see Bill Ackman chance occasionally on a good phrase. Here’s one:

This is right! How valuable a thing is is one of the things that makes it valuable.

More specifically, a high share price allows a company to print its own acquisition currency. Offering to buy real businesses with fantasy-valued paper is an established strategy that’s been employed by corporate raiders such as Bill Ackman. In the olden days, we used to call it escape velocity.

A few examples. Let’s say an online bookmaker is making lots of money from markets where gambling is illegal, or unregulated, which often means the same thing. What’s needed to achieve escape velocity is for management to mutter platitudes for a few years whenever anyone asks about geographic risk, while using the puffed-up equity to acquire established bookies as quickly as possible. These businesses are cheaper because they are delivering lower growth rates, via only taking legal bets, so it’s swings and roundabouts. If the strategy works, by the time the unsustainable bits of the business fail, the sustainable side will make up the majority.

Or let’s say a defence contractor is selling equipment that, absent a western European land war, will sit in warehouses unused for the next 20 years. Achieving escape velocity means fudging questions about repeat orders and paying in inflated stock to buy a whole portfolio of sector peers, ideally of the type that last won a big order 19 years ago.

Or let’s say a dial-up internet service provider uses overvalued equity to buy a media conglomerate … OK, that’s not a good example. There are few more totemic representations of value destruction than the $99bn goodwill impairment AOL Time Warner booked in 2002. That its shareholders paid in dilution for AOL’s failure to launch was no compensation.

We’re on the theme because SpaceX agreed in April to buy the autocode generator Cursor for $60bn, payable in stock. It all looks sensible enough. SpaceX is a grab-bag of long-dated concepts that challenge any investor’s forecasting ability (as well as many a scientist’s understanding of physics). Adding a product with a current use case to the AI division adds a bit more certainty to the whole. Escape velocity is some way off, but it’s a start.

The immediate unknown is around dilution. Cursor shareholders are due to swap their shares for SpaceX shares when the deal closes later this summer. On Friday, before SpaceX’s market debut, the $60bn purchase would’ve meant around 444mn new shares. By Tuesday, it would’ve meant issuing fewer than 300mn shares. This may just be capitalisation-table bookkeeping, since $60bn is still $60bn whichever way, but still. Think about it all for too long and the numbers involved begin to look arbitrary. What even is dilution when the price-to-earnings ratio is infinity?

Another useful acquisition currency to have is currency. SpaceX was said this week to be preparing a bond sale to raise $20bn, which will pay back the bridge loan Elon Musk used to fold the spacecraft business into his brain rot and drip-feed propaganda operations.

Ahead of the bond issue, Moody’s, Fitch and S&P Global all rated SpaceX debt investment-grade. As well as the expected stuff about government contracts and the strategic importance of low-orbit satellite communications, the three agencies noted its “continued access to both equity and debt capital markets.”

SpaceX must be a safe investment because, if the company ever needs more money, it only has to ask. Future capital issuance is sustained by perpetual motion. The stock represents nothing other than itself. One of the things that makes SpaceX so valuable is how valuable it is.

A week on Alphaville

○ Is Lloyd’s of London the world’s oldest pod shop?

○ STRC, the death-spiral unconvertibles Strategy founder Michael Saylor created by consulting ChatGPT, have unpegged and are necrotising their host.

○ Maybe we can rediscover social connection and shared identity in these times of online fragmentation through the theatre of overpriced IPOs?

○ What makes a joint venture? For Metlen, a London-listed Greek metals and lots-of-other-things company, it’s complicated.

○ Donald Trump made Iran’s stocks great again.

○ To the winner of the Ultimate Fighting Championship bout that marks Donald Trump’s 80th birthday, a purse of cratered memecoin.

○ The maiden FOMC statement of the Kevin Warsh era was short.

○ “Expectations around rates and inflation were linked, until they weren’t”.

○ Can AI chatbots, Goldman Sachs analysts and Alphaville writers predict World Cup score lines? The evidence so far strongly suggests no.

○ Digital storage keeps getting more expensive.

Best of Further Reading

○ The New Yorker has a long read on Citadel founder and dinosaur collector Ken Griffin.

○ Lisp programmer Paul Graham reflects to the Oxford Union on how to earn a billion dollars.

○ Voluble AI critic Ed Zitron had a look at OpenAI financial statements and asked the FT to confirm the numbers were genuine, which we did. Dan Davies shares his thoughts on the leak.

○ UK video games history blog Super Chart Island has a write-up of the game censorship brouhaha of the early 1980s.

Chart blast

○ The US exceptionalism trade has come roaring back.

○ Global oil supplies will not come roaring back.

○ Palantir has helped the NHS reduce waiting lists, albeit it’s nearly all from one of the 16 trusts using its platform.

○ Martin Wolf calls for a global agreement on how AI is controlled.