Microstrategy Incorporated: Pipe

Abstract

In mid-June 2000, MicroStrategy CEO Michael Saylor is considering an investment of $125 million of convertible preferred stock in his firm by a group of private investors including Citadel Investment Group LLC. The offer comes at a difficult time for the company, because only three months earlier, its stock had reached a record price of $300 per share. At that point, the company had registered a $1 billion seasoned equity offering. Shortly thereafter, the company was forced to restate its earnings after running afoul of the SEC for its revenue-recognition practices. Although the restatement did not change the company's cash-flow position, it did result in an SEC investigation and the cancellation of the stock offering. In order to meet Saylor's ambitious plans for MicroStrategy, additional funding must be obtained. With public-market funding sources shut off, students must evaluate what the best course of action is for the firm at this moment. Students are asked to evaluate a new form of venture financing called private investments in public enterprises (PIPE). PIPEs differ from conventional floating-rate convertibles in that the conversion price in most cases can only be adjusted downward. The case considers both the pros and cons of these investments. Excerpt UVA-F-1368 Rev. Dec. 20, 2010 MICROSTRATEGY INCORPORATED: PIPE I just hope I don't get up one day and have to look at myself in the mirror and say: “You had $ 15 billion and you blew it all. There's the guy who flushed $ 15 billion down the toilet.” —Michael Saylor in the New Yorker, April 2000 In the middle of June 2000, Michael Saylor sat in his office thinking about an investment proposal that his company—MicroStrategy—had just received from a private investment group. The group, made up of Citadel Investment Group, Promethean Asset Management LLC, and Angelo, Gordon & Co., had offered to invest $ 125 million in MicroStrategy in the form of a floating-rate convertible bond. This investment constituted a new type of venture investing called private investment in public enterprises (PIPE). While Saylor welcomed the offer, he was concerned that the terms of the deal might put downward pressure on MicroStrategy's stock at the expense of existing shareholders and himself, as owner of 57% of the outstanding shares. . . .