Inside Nadella’s All-Cash Activision Play

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The Jack Welch of Crypto?

Why didn’t Microsoft buy Activision with its near-all-time-high stock? Why did Michael Saylor convert MicroStrategy’s treasury reserves into Bitcoin? Perhaps it’s because, as Ray Dalio says, “cash is trash.”

WILLIAM D. COHAN

In the near-zero interest rate environment that the Federal Reserve has imposed on us for more than a decade, a question vexing many of the most successful corporate executives is what to do with the cash building up on their balance sheets. Big Tech, no surprise, is sitting on the motherlode. Apple has $190 billion of cash. Alphabet, the parent company of Google, has a cash pile of $142 billion. Amazon has $79 billion in cash. Meta, formerly Facebook, has $58 billion. Microsoft, the second most valuable company in the United States, with a market value of $2.2 trillion, has a cash balance of $131 billion. Or it did, until last week, when the company announced that it would be using about $70 billion of it to pay for Activision Blizzard, its shiny, new gaming behemoth.

It has not been fashionable in recent years for big companies to pay for big acquisitions using their own cash hordes. For starters, most companies don’t have enough cash on hand to expend on buying another company. And those that do have the cash often prefer to preserve that cash for other purposes, such as paying down debt, paying dividends to their shareholders or using it to buy back stock. Or to save it for a rainy day. Such decisions tend to ebb and flow depending on the economic cycles, of course, but after a 13-year bull-market, the biggest acquisitions lately have been done using stock, since the equity value of many companies is at or near all time highs (or was, until the ongoing correction kicked in). Why not use high-priced stock to make an acquisition, the thinking goes, since it may all be just so much funny money anyway?

The use of stock as an acquisition currency is also usually tax-free until the beneficiary decides to sell it, whereas cash received is taxable. Activision C.E.O. Bobby Kotick, for instance, could receive around $600 million in cash—the value of his Activision stock plus a payment triggered by the change in control—followed by a whopping capital gains bill. Had Microsoft structured the deal in stock, Kotick wouldn’t face the tax man until he decided to sell the shares, giving him ample time to get his estate and liquidation strategy in order.

I’m not too worried about Bobby. The deal won’t close for around a year, which will offer what I presume is an armada of lawyers and tax-structuring specialists ample time to chart a strategy to prevent too much leakage. More interesting to me is the flipside. If I were Satya Nadella, who has been the superstar C.E.O. of Microsoft for nearly seven years, I would have thought long and hard about paying for Activision with my high-priced (and possibly overvalued) stock. Despite being down around 15 percent from last month’s all-time high, Microsoft stock is still up close to 30 percent in the last year. But Nadella didn’t use Microsoft’s stock for the Activision deal. Nor did he choose to borrow money from a bank or to issue bonds to eager investors, which he certainly could have done easily given that Microsoft is one of the few AAA-rated companies around. It has long-term debt of only about $50 billion and net-debt—cash minus long-term debt—of negative $80 billion.

Instead, Nadella will use a little more than half of Microsoft’s cash horde to pay for Activision. His strategy likely has to do with the fact that as Ray Dalio, the hedge fund titan, likes to say, “Cash is trash.”

The logic here is pretty simple. Why not use the billions in cash sitting on Microsoft’s balance sheet, where it’s not only losing its buying power due to rising inflation—running about 7 percent at the moment, the most in 40 years—but is also probably earning a paltry return in the vicinity of 2 percent annually, given the company’s disclosed mix of investments comprising commercial paper, CDs, Treasuries (some $93 billion of the cash), municipal bonds, mortgage-backed securities and the corporate debt of other companies. Between the historically low interest rates on the debt securities that Microsoft seems to be investing in and the rising rates of inflation, Dalio is right: cash is trash. Much better, Nadella must have thought, to use that cash to triple-down on gaming, a business Microsoft was already in but now will become one of the dominant players.

But is there a better, less traditional, use of corporate cash that will potentially yield a higher return than investing it in short-term and long-term securities or doing complex M&A deals? That’s a question that Michael Saylor, the C.E.O. of MicroStrategy, a small publicly traded enterprise software company, has been contemplating since at least July 2020, when he realized that his company’s $500 million cash balance was rapidly losing its purchasing power because of the combination of low interest rates and high inflation. He decided he couldn’t sit idly by and allow that to happen. Instead, he went whole hog on Bitcoin. Really whole hog—to the point where Saylor has become one of the cryptocurrency’s most zealous advocates, through thick and thin.

Videos of Saylor extolling the virtues of Bitcoin are ubiquitous on the Internet. He spent more than an hour last November educating Tucker Carlson about the relevance of Bitcoin, especially in a high-inflation, low-interest rate environment. The encounter took place on Carlson’s non-Fox online video channel, Tucker Carlson Today. Carlson was smart enough to just let Saylor talk and talk and talk. A graduate of MIT, with a degree in aeronautics and astronautics, Saylor speaks in full paragraphs. He can make a Bitcoin believer out of the most ardent skeptics. I spent two hours with him on a Zoom call last week. He was mesmerizing.

The past few weeks haven’t been a good stretch for Bitcoin, however, or for MicroStrategy. The price of Bitcoin is down nearly 20 percent since January 1; MicroStrategy’s stock is down 35 percent since then, including an 18 percent collapse on January 21 alone, after the Securities and Exchange Commission rebuked the company for the way it accounted for its Bitcoin holdings. Still, despite the recent Bitcoin rupture, Saylor’s decision to invest in Bitcoin has worked out pretty well for MicroStrategy—and certainly better than if he had kept that $500 million in cash.

Back on August 11, 2020, Saylor announced that MicroStrategy was buying 21,454 Bitcoins for $250 million, or $11,653 per Bitcoin. He also announced that the company would use another $250 million in cash to offer to buy back stock from those shareholders who didn’t like his Bitcoin gambit. He used the cash that wasn’t returned to shareholders to buy more Bitcoin. But that wasn’t enough Bitcoin for Saylor. MicroStrategy then started borrowing money to buy Bitcoin. The company did two convertible debt deals and a senior debt offering, using the $2.2 billion, or so, of proceeds to buy more Bitcoin. MicroStrategy’s average purchase price for Bitcoin is around $30,000. It now owns 122,478 Bitcoins, worth about $4.7 billion, some $900 million more than the company’s market value. In November, when Bitcoin hit a peak of $67,682, MicroStrategy’s Bitcoin was worth $8.3 billion. Bitcoin is now trading at about half that price.

When he started the Bitcoin program, MicroStrategy’s stock was $120 per share, $60 of which was in cash. “Our investors told us the cash was trash,” he said on CNBC in 2020. “It was a liability on our balance sheet. And if we had given it all back, we would be trading at $60 a share. Instead, we rotated our shareholder base and transformed ourselves into a company that's able to sell enterprise software and to acquire and hold Bitcoin and we've done it successfully with leverage that has increased the power of the brand by a factor of 100. We just had our best software quarter in history or in the last 10 years last quarter. The core business is up 10 percent. The Bitcoin business is driving shareholder returns. I think the employees are happy and the shareholders are happy.” A year ago, the MicroStrategy stock hit $1,023 per share, up nearly 10 times in six months. Even with the stock now at around $370 a share, it still represents a tripling since Saylor made the decision to go long and hard on Bitcoin.

Saylor remains utterly undeterred by the concerns around Bitcoin, despite the recent halving of its price. He’s said repeatedly that he’s never selling MicroStrategy’s Bitcoin. He told me the same thing. No other C.E.O. of a publicly traded company has become such an ardent Bitcoin zealot, and put his money where his brain is.

But it’s hard to know if he’s right. Last November, with Bitcoin at $67,000, Saylor looked like some kind of visionary genius. With Bitcoin’s price cut in half in two months, it’s no longer quite so obvious. The $900 million of convertible debt that MicroStrategy issued a year ago to buy Bitcoin is now trading around 62 cents on the dollar, yielding twice what the average junk-bond is yielding.

The volatility alone is not for the faint of heart, although Saylor doesn’t seem the least bit phased by it. At the moment, MicroStrategy’s shareholders are still close to three times better off than they were before Saylor decided to take the Bitcoin plunge in July 2020. And with interest rates still at historic lows, although on the rise, and inflation at a 40-year high, cash remains a deteriorating asset, which helps explain why Microsoft used it to buy Activision. What remains murky, at best, is whether Bitcoin is the answer to these problems.