December 16, 2021
Thanks for reading Axios Capital this year!
- In the final newsletter of 2021, I cover all-stock transactions in private companies; insider trading; NFTs of paintings; the stock-market reaction to the latest COVID-19 wave; and much more. It's 1,641 words, a 6-minute read.
1 big thing: Shopping with a private currency
Something rare is happening with regularity in the digital media world: all-stock acquisitions by private companies.
Why it matters: It's hard to negotiate a deal when you're paying in stock with limited liquidity and valuation uncertainty.
- In certain circumstances, however, such acquisitions can look attractive to both sides.
Driving the news: Vox Media is buying Group Nine Media in an all-stock deal. Both sides are themselves products of the trend: Vox previously bought New York Media, while Group Nine previously bought PopSugar, both in all-stock deals.
- Rival digital-media company BuzzFeed bought HuffPost in the same way last year.
The big picture: When private companies get acquired, they overwhelmingly get bought for cash, according to data from SRS Acquiom. Only between 2% and 3% of such deals are done purely in stock — and in most of those cases the buyer is a public company, so the valuation is unambiguous.
Between the lines: To be able to get the attention of advertisers spoiled by the Facebook-Google duopoly, digital media companies need scale. That's both a carrot and a stick: Becoming part of a significantly larger operation should increase a company's valuation multiple, while failing to do so can be an existential risk.
- When the target company is losing money, as both HuffPost and New York Media were doing, the urgency to sell becomes even greater.
How it works: All-stock deals can sometimes have valuation figures attached to them, but ultimately those numbers are meaningless. In all-stock deals there's no haggling over absolute valuations, just relative valuations. Which is often easier.
- These mergers aren't an exit for the target company's shareholders. Instead, they're a way to stay alive and hitch your wagon to a star you helped create.
Be smart: For much of the past year, conventional wisdom held that the way for digital-media companies to grow was going public via a SPAC. That would give hungry would-be acquirers hundreds of millions of dollars of cash, as well as as the ability to effectively print money by issuing new shares in takeover transactions.
- BuzzFeed shows the danger of SPACs, however. The promised cash never materialized, as SPAC investors redeemed their investments before BuzzFeed was acquired.
- BuzzFeed's sinking public share price also means it can't spin fanciful stories about how much a combined company might be worth.
What they're saying: "Doing a stock deal like this signifies that we can be the acquirer of choice," Group Nine CEO Ben Lerer told Axios' Sara Fischer. "We have a currency that's going to be valuable."
- In the current digital media climate, only by remaining private can Lerer keep that dream alive. Then, if and when the weather changes, Lerer still has a SPAC he can use to take Vox Media public.
The bottom line: It's easy to see why companies would like a roadmap to dollars when they're being bought. But a deal denominated in private stock can still be more attractive than remaining independent.
2. The rise of legal insider trading
Insider trading — the legal kind — hit new highs in 2021, and the SEC wants to make sure it isn't being abused.
Why it matters: Big-dollar insider stock sales are increasingly common, with no fewer than 82 different corporate insiders selling more than $100 million of stock in 2021. That's up from just 32 in 2019.
Driving the news: The SEC wants to make it much harder for insiders to take advantage of provisions surrounding stock sales that effectively make insider-trading prosecutions impossible.
- "Over the past two decades, we’ve heard concerns about and seen gaps in Rule 10b5-1," said SEC chair Gary Gensler in a press release.
- If Gensler gets what he wants, those gaps are likely to shrink dramatically, if not be eliminated entirely.
How it works: Senior executives and board members are always considered corporate insiders — but they also need to have some way to sell their company shares.
- The most common way for insiders to legally do that is to set up a 10b5-1 plan, where all open-market stock sales and purchases are executed according to pre-baked instructions.
- 10b5-1 plans are generally opaque and can be abused, however. SEC filings in which companies disclose the details of their plans are filed by mail, rather than electronically, stored in the SEC reading room, and destroyed after 90 days.
- Gensler seeks to curb abuse by forcing such plans to be put in place 120 days before any stock sales; by requiring insiders to certify that they aren't in possession of material non-public information when they put the plan in place; and by allowing insiders to execute a single-trade plan no more than once a year.
Companies will also have to disclose the existence of all 10b5-1 plans, along with their terms.
By the numbers: Insiders have sold more than 3 billion shares so far this year, per InsiderScore, the first time that level has been breached. Total proceeds of $162 billion represent an increase of almost $100 billion over the 2019 level of $69 billion.
What they're saying: The SEC proposal "speaks to the power of academic research for policy," according to Dan Taylor, a Wharton professor who has led much of the research into the potential abuses of 10b5-1 plans.
The bottom line: The SEC proposal isn't law yet. But it addresses weaknesses in a part of the market that's growing extremely quickly.
3. Why NFTs of real art are so difficult
Selling fractionalized art is hard, and generally requires registering with the SEC as an issuer of public securities. Selling fractionalized art as NFTs on the blockchain, however, is even harder, as one Swiss company is discovering.
Why it matters: Investors, including billionaire Bill Ackman, have put $20 million into Origyn, a company that plans to create "digital twins" of paintings, watches, and collectibles, at a valuation of $300 million. But the first attempt to fractionalize a painting by Magritte is already stumbling.
How it works: Origyn Art, a subsidiary of Origyn, plans to sell the Magritte off as 200,000 NFTs, each representing a separate tiny part of the painting, but each also representing an identical ownership stake in the work.
- That's possible under Swiss law, which allows such sales to avoid securities law if the painting is worth less than $8 million, or if it is being sold to fewer than 500 investors.
- The pitch: "Millennials value ownership over possession," Origyn Art CEO Edouard Planchat tells Axios. The painting will remain in storage in Switzerland until it's sold — but owners of the NFTs will also be able to download a high-resolution image of the work, and enjoy it that way.
The catch: Origyn owns the painting, but it doesn't own the right to reproduce the painting. In the art world, the artist — or, in this case, the artist's estate — invariably retains control of the copyright to the work.
- To its credit, Origyn recognizes that it needs the Magritte Foundation's permission to be able to create the "digital twin." It also plans to give some of the resale royalties — generated whenever the NFTs are traded — to the Foundation.
- So far, however, that permission has not been forthcoming — even though the current owner of the work bought it directly from the Foundation.
Be smart: Most NFTs are sold by copyright owners like, say, Beeple. If the Magritte Foundation gives Origyn permission to sell an NFT of a given work, then it would effectively be giving up the right to sell an NFT of the work itself.
- That's a tough decision to make, and it's understandable that the Foundation is taking its time making it. (The Magritte Foundation did not respond to a request for comment from Axios.)
The bottom line: The general consensus in the NFT world is that NFTs should only be minted by the creator of the work in question. When art collectors try to use NFTs to fractionalize art they didn't create, that can cause problems.
4. Stocks shrug off the Fed and Omicron
The S&P rallied to a level just shy of its all-time high on Tuesday, after the Fed made a hawkish pivot and tightened monetary policy significantly compared to its last meeting.
- The bad news was compounded with data out of London showing the number of COVID-19 cases quite literally off the charts compared to any previous wave of the pandemic.
- A COVID-19 explosion is imminent in the U.S. too, a senior Biden administration official told Axios' Caitlin Owens. Case rates could easily exceed the peaks seen in January 2021.
The Fed is sanguine, however, with chair Jay Powell saying he is fully confident in the economy's ability to withstand another wave of disease.
Between the lines: So far, each successive wave of the pandemic has had a smaller economic effect than the last. The market is clearly betting the same will be true this time. But it's far too early to be sure.
5. The art boom, charted
Sotheby's has sold $7.3 billion of art so far this year. That number is so high that owner Patrick Drahi is reportedly considering an IPO already, just two years after taking the auction house private.
6. Coming up: Neil Irwin
The great Neil Irwin will be taking over this newsletter on Jan. 20; I'll be back in April when I return from book leave.
- Go deeper: Neil has already written the definitive account of the Fed pivot and the way Fed chair Jay Powell recalibrates his opinions in the light of new data.
- Go deeper still: If you're in the market for some holiday reading, I can recommend his book on how three unelected central bankers — Ben Bernanke, Mervyn King, and Jean-Claude Trichet — saved the world in 2008.
7. Building of the week: Therme Vals
Peter Zumthor's thermal baths in Vals, Switzerland, have become not only a place to relax in the local hot springs, but also a site of architectural pilgrimage.
- Constructed from 60,000 slabs of locally quarried quartzite, the baths feel almost geologic in nature. They also feature meticulously-designed views over the Alps.