Unicorn Buybacks and Securities Law

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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People are worried about unicorns doing stock buybacks.

No, they're not really worried, but I appreciate that Uber Technologies Inc. hasn't waited to go public to start doing stock buybacks from its employees. "Those who work at the San Francisco company for at least four years can sell as much as 10 percent of their shares."

Two themes that I like to talk about around here are:

  1. Private markets are the new public markets, and massive multinational companies with 11-digit valuations can raise billions of dollars from institutional and retail investors without the formality of going public; and so
  2. The main function of public markets these days is not for companies to raise money, but for them to return money to shareholders.

Uber is the poster unicorn for the first theme, and I'd thought for the second as well, but perhaps it will become massively profitable and move to capital-return mode without ever going through an initial public offering.

But not yet. Now it is losing money and being subsidized by (billions of dollars from) investors. Which makes the buybacks particularly fascinating:

While Uber’s buyback approach can help it retain talent, it may also benefit the company’s bottom line. Using its own money, Uber purchases common stock for 25 percent to 35 percent less than the price of preferred shares from its most recent funding round, one person familiar with the matter said. It can then turn around and sell shares at a premium in a subsequent round. Still, an employee who got their stock four years ago stands to make more than a 10-fold increase on the sale.

When I was an investment banker working on structured equity issuance and buybacks, one dorky joke that we had was that companies could do "equity-financed stock buybacks." The idea was that a company would issue new stock, and use the money it raised to buy back stock. This of course makes no sense -- it was a joke -- though it came up more often than you'd think. (Bankers like to propose trades, what can I say.) One reason it makes no sense is that it is pointless for the company: Issuing stock and buying back stock leaves you in the same place as before. Another reason it makes no sense is that it is pointless for investors: If outsiders want to buy stock, and employees want to sell stock, the employees can sell stock to the outsiders, and the company never needs to get involved. In Uber's case, where the stock is not public and there are restrictions on trading, this does not apply; the buyback program fills a real need for employees.

But the deeper economic problem with the equity-financed stock buyback is what you could call the bid-ask spread. When public companies sell stock to the public, they usually need to do it at a discount: If your stock is trading at $100 before the offering, you're going to sell stock at $98 or $95 or whatever. (You're creating new supply, driving down the value; plus you are selling a big block and paying to get liquidity.) And when public companies buy back stock, they usually need to do it at a premium: If your stock is trading at $100 before the buyback, you're going to pay $101 or $102 or whatever in the buyback. (You're reducing supply -- and increasing earnings per share -- which drives up the value; plus you are buying a big block and paying to get liquidity.) So the equity-financed stock buyback -- selling stock at $98 to buy back the same stock at $102 -- is obviously dumb.

With Uber -- with unicorns more generally, perhaps -- it's the opposite. Uber is, as it were, getting paid the bid-ask spread. Uber isn't paying for liquidity on either side of the trade; it's being paid for liquidity. When Uber sells stock to new investors, it can get a premium, because the stock is sexy and scarce and not available on the secondary market. When Uber buys stock from its employees, it does it at a discount, because the employees are desperate for liquidity and can't sell their stock anywhere else. Uber can make a profit just on issuing and buying back its own stock. I kind of don't understand why it would even bother building self-driving cars; it's already built a perpetual motion machine.

Sexual harassment as securities law.

One thing that we talk about around here is that all law is securities law: If a public company does a bad thing, chances are it has also violated the securities laws by failing to disclose that bad thing, and so the Securities and Exchange Commission has a universal jurisdiction to investigate whatever badness it can find. So securities regulators are also antitrust regulators, environmental regulators, gun-control regulators, automobile regulators, conflict-minerals regulators and regulators of political speech. And so of course a bunch of people pointed me to this story yesterday:

Federal prosecutors are investigating whether 21st Century Fox Inc. should have disclosed to investors that it made secret settlement payments to female on-air hosts who alleged sexual harassment.

The investigation came to light in New York state court on Wednesday when a lawyer, Judd Burstein, said a client he didn’t identify had received a grand-jury subpoena from federal prosecutors in New York. Burstein, who was in court on a case against Fox, said he was later told by prosecutors in Manhattan that the securities unit is investigating “sexual-harassment issues” at the company.

Sexual harassment is not generally a matter for federal securities prosecutors. But the concern here seems to be that Fox entered into secret settlements of sexual-harassment claims against Roger Ailes and Bill O'Reilly that might have been material to shareholders. That does sort of look like a securities issue. Like, there are contracts, and money, and the disclosure of where the money went might not have been as clear as some investors might like. How did Fox document these payments in its books and records, and in its audited financial statements? It's relatively easy to recast this not as a "sexual-harassment issue" but as an accounting one.

But: What if it wasn't? Imagine that a powerful executive at a public company sexually harassed many women over many years, but didn't reach settlements with them, and just intimidated them to keep quiet. Then one day they all went public (and sued). Is that a securities law issue? I think it might be. The executive's actions -- which exposed the company to the risk of expensive lawsuits and reputational damage -- are material to shareholders, just as material as any settlements would be. If the company didn't disclose those actions -- and it is in my experience rare for public companies to disclose a risk factor like "our CEO is a lech" -- then why wouldn't that be a securities-law violation? The SEC doesn't seem interested in acting as a universal sexual-harassment regulator for public companies, but if it wanted to it probably could.

Elsewhere in SEC jurisdiction: "The new Republican leader of the Securities and Exchange Commission has imposed fresh curbs on the agency’s enforcement staff, scaling back their powers to initiate investigations of alleged financial misdeeds."

Congrats Yahoo.

In the back of your mind, didn't you kind of think that the revelations of hacking at Yahoo would lead to a breakup of its deal to sell its core business to Verizon and leave it back at square one? I just felt like in 2022 I'd be reading and writing about how Yahoo needs to either find a strategy for its core business, or find a way to get Alibaba Group Holding Ltd. to buy it, or otherwise figure out a way to escape the labyrinth in which it has found itself. But no it's fine, "Verizon Communications Inc. is close to a renegotiated deal for Yahoo! Inc.’s internet properties that would reduce the price of the $4.8 billion agreement by about $250 million after the revelation of security breaches at the web company." Yahoo will finally be able to get rid of itself and concentrate on what's left: its massive Alibaba stake, free of the distractions of the internet business. Although wait:

In addition to the discount, Verizon and the entity that remains of Yahoo after the deal, to be renamed Altaba Inc., are expected to share any ongoing legal responsibilities related to the breaches.

Ugh, guys. We've been talking about this forever. What you need is a clean shiny box (Altaba) to hold your Alibaba shares, so they can trade like a proxy on Alibaba, and so Alibaba can eventually buy the box. That was the whole point of selling the core business: to put the Alibaba shares (and, yes, fine, some Yahoo Japan Corp. shares, and some patents) into a clean box, separated from a core internet business that, by some accounts, might be worth less than zero. Now Yahoo is smudging the box. Altaba will get rid of the actual money-making parts of the core business, but will keep the uncertain contingent liabilities. (Though not all of them: "Verizon would give up its right to sue over the idea that Yahoo had covered up the hacks.") "Core Altaba" -- the Altaba remnants of core Yahoo -- will definitely be worth less than nothing. Good job everyone.

Elsewhere in M&A second thoughts: "Anthem Wins Bid to Block Cigna From Dumping $48 Billion Deal."

Chicken Libor!

Here's a Bloomberg Businessweek feature on my favorite recent financial scandal, Chicken Libor. Well, not really. When I talk about Chicken Libor, I mostly mean allegations that poultry producers misrepresented chicken prices when they were surveyed for a widely-used index, thus pushing up the index price. (Like Libor.) But this story is more about broader antitrust concerns in the chicken industry, and focuses on a different survey: "Agri Stats, a private service that gathers data from poultry processors, produces confidential weekly reports, and disseminates them back to companies that pay for subscriptions." As one law professor explains,

information-sharing services in other industries tend to deal in averaged-out aggregated data—for example, insurance rates in a given state. Such services run afoul of antitrust law, he says, when they offer projections or provide data so detailed that no competitor would reasonably share it with another. Getting detailed information is a particularly useful form of collusion, Carstensen says, because it allows co-conspirators to make sure they’re all following through on the agreement. “This is one of the ways you do it. You make sure that your co-conspirators have the kind of information that gives them confidence—so they can trust you, that you’re not cheating on them,” he says. “That is what creates stability for a cartel.”

Man, antitrust law is hard. Transparency itself can create antitrust problems; telling your competitors how much you sell and how much you charge, with enough detail and frequency, can allow them to coordinate a cartel. I wonder if there are any lessons for the financial industry, as it moves toward a future of greater transparency and more consolidation.


Here is an article about how "cross-asset correlation recently fell to its lowest level since 2006," even as more money continues to move from active to passive strategies. One obvious takeaway is that money always flows to the strategy that was just successful, not the one that will be soon. Passive investing dominated a world of stability, supportive monetary policy and high correlations; active investing is poised for a comeback "when asset prices can go down as well as up." So of course everyone is rushing into passive.

There are some nuances to that story, though. For one thing, cross-asset correlations don't necessarily tell us much about active versus passive management: Most passive funds, and even most active funds, focus on one asset class. "Passive investing" is, in practice, about actively choosing an asset class, and then trying to buy the whole market for that asset class. If stocks are going to go up while bonds are going to go down, you can make money by buying a stock index fund and selling a bond index fund. And if you instead decide to buy an active bond fund managed by a brilliant manager, it's still going to disappoint you if the whole bond market is heading down.

Also here's a great line:

“In theory, there is a better backdrop now, but obviously those fund managers would still need to pick the right things,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

That is usually the big problem in investing. If all the things are the right things, then it's hard to distinguish yourself. If many of the things are the wrong things, though, it's hard to pick the right ones.

Elsewhere: "Record $13 Billion Pulled From Biggest Public U.S. Hedge Fund Och-Ziff."


"Why are so many machine-learning experts writing high-frequency-trading code instead of curing cancer," people ask. Well:

Attention Wall Street: Instagram is looking to hire.

Facebook Inc.’s photo-sharing app plans to double its engineering staff in New York this year to 150 people. In particular, it is looking for machine-learning experts, many of whom work for hedge funds or investment banks. These “recovering quants”—as Instagram co-founder Mike Krieger calls them—will allow Instagram to more personally tailor its feed and other features to its 600 million users.

In general, the realistic alternative use for all of Wall Street's wasted talent is not curing cancer; it's optimizing the delivery of advertisements in Silicon Valley.

An arbitrage.

Aaron Brown wrote about "an underappreciated magic to allowing diversity of numeraire" (back when the dollar/euro forward was about $1.40):

Suppose Anne from the United States makes a bet with her Catalan friend Anaïs. If in one year it costs more than $1.40 to buy €1.00, Anaïs will pay Anne €1.00. Otherwise Anne will pay Anaïs $1.40. From Anne's point of view, if she wins, she wins €1.00, which she can sell for more than $1.40. If she loses, she loses $1.40. Anaïs uses parallel reasoning. If she wins, she wins $1.40, which she can sell for more than €1.00. If she loses, she pays €1.00. Both women have positive expected values from this bet.

Here is ... maybe the opposite trade?

Gambling site BetMoose allows anonymous players to make wagers on all manner of events from the Oscars to the French presidential election. But one bet in particular has an odd payoff structure: Will Trump ban Bitcoin?

An anonymous player, “Protus,” has a wager for both “yes” and “no,” which might normally be a sort of arbitrage.


He or she is American and the bet is payable in Bitcoin. A “yes” outcome would make it impossible to make good or to get paid. A “no” bet, on the other hand, is all reward with zero risk.

Ah yes, but who is going to take that "no" bet against you, except you? Elsewhere, Kyrgyzstan's central bank wants all of its citizens to own at least 100 grams of gold.

People are worried about unicorns.

Snap seems unworried:

Snap Inc. set the valuation on its initial public offering at between $19.5 billion and $22.2 billion in what could be the third-biggest technology offering of the past decade, people familiar with the matter said.

The maker of disappearing-photo application Snapchat is valuing its shares at $14 to $16 on a diluted basis, the people said, asking not to be identified as the details are private. It could be the biggest technology IPO since Alibaba Group Holding Ltd. raised a record $25 billion in 2014.

I suppose that betrays a little worry -- previous guesses had gone as high as $25 billion -- but that's still a big IPO. Elsewhere in unicorns, or geese, or goosicorns, Canada Goose Holdings Inc. filed the papers for its IPO.

People are worried about bond market liquidity.

People are worried that it's hard to buy credit-default swaps on weird hybrid European bank debt:

“The credit-default swap market hasn’t kept up with the fast-moving changes in bank bonds,” said Louis Gargour, chief investment officer of London-based LNG Capital, an alternative investment-management firm. “That’s a problem when you want to hedge a specific part of the capital structure.”

I never quite understand these complaints. Like, if you are buying weird hybrid European bank debt, isn't that sort of necessarily a bet on the credit quality of that particular bank and security? I can see why it would be attractive to have basis arbitraging instruments available, sure, and CDS is helpful for dealing desks, but I don't get why investors would need CDS. If you are worried about the credit, just don't buy the bonds!

Things happen.

Key Republican Casts Doubt on Quick Action to Dismantle Dodd-Frank. Janet Yellen and House Republicans Clash Over Fed’s Performance. Trump Takes on Tech Industry in Early Policy Moves. Asian Conglomerates, Flush With Cash, Scour for U.S. Fund Deals. Behind the Fortress Deal: A Japanese Billionaire’s Huge Ambitions. Fortress Stock Volume Surged With Options on Day Before Buyout. What Happens When Two Bankers and an Engineer Get a Billion Dollars? Stephen A. Feinberg of Cerberus Capital Management may "lead a broad review of American intelligence agencies" for the White House. Arconic Sells Most of Its Alcoa Stake Amid Battle With Elliott. Meet the Retirement Savers Who Oppose the Fiduciary Rule. Bank of America's decade-old options expired worthless. Building a Cashless Economy While Even Officials Shun Banks. Will Trump Rescue the Oligarch in the Gilded Cage? Trump's F-35 Calls Came With a Surprise: Rival CEO Was Listening. Ticketing Startup Alleges Ticketmaster Used Hacking to Steal Trade Secrets. Mary Jo White to Rejoin Debevoise & Plimpton. Elon Musk Is Really Boring. Carl Icahn vs. Dealbreaker. Lovestruck Britons are losing $50m a year to dating-site con artistsWhaleSynth. Model weed dealers. Local Council Is 'Sorry' After Planting a Bunch of Trees on a Soccer Field. Congrats Rumor!

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net