So Meta is sitting on over half a trillion in debt. That’s somewhere between half and a third of their market cap but, more importantly, it’s more than their 2018 market cap. If the current bubble pops like .com (it looks like it’s worse, given the much larger disconnect between spending and revenue) then their market cap will be less than their debt.
Their market cap is larger than their asset valuation (companies where this isn’t the case don’t last long, vultures jump in, buy enough shares to take the company private and sell the assets). If your debts are larger than your assets, you are insolvent. That doesn’t always mean bankrupt (the lenders stand to lose a lot more than they would gain by forcing bankruptcy), but it does basically cut off their ability to raise more money. Companies like this raise in two ways:
They can borrow money. Lenders give them interest rates based on their projected growth and stability. A company that is doing well (or, at least, looks to auditors like it’s doing well) can borrow easily at low rates because the banks know that they’ll get their money back. And that’s attractive to a company because they should be able to invest the money in expanding the business to get a higher return than the interest, without diluting the stock price. A company in trouble will have to pay a high rate. If your outstanding loans are larger than your assets, you’re a higher risk of default, so the interest rates go up a lot.
The other way is to issue more stock. This is easy for a growing company. If you’re growing at 20% a year, you can issue 10% more stock and still be growing at a rate that gives investors a good return. And, if you invest the newly raised money in growing the business then it increases the rate at which the company’ value grows up so the dilution is not so bad. When Microsoft bought GitHub, they issued new shares to cover it, paid in shares, and the market agreed with the investment so the share price went up within a few days by enough to compensate entirely: they effectively bought GitHub for nothing.
When a company’s share price is stable (or, worse, going down), issuing more shares causes the value to drop, which causes other people to sell. And this means raising money by issuing shares is hard. This is worse for tech companies because they use share issuing as a large part of salaries. When I joined Microsoft in 2018, the share price was almost exactly $100. The signing stock quadrupled in value while I was there and ended up being a significant amount of my total compensation in that time. Shares vest over several years, so by the time I actually received them they were worth a lot more than when Microsoft issued them, which meant that the amount they needed to issue was lower as long as the line was going up. While the line goes up, a lot of employees will hold the shares for a long time but when the line is going down then a lot will sell as fast as possible, which means you’re issuing shares faster and they’re being sold, both of which push the price down. The way you fix this is to pay more cash and fewer shares, but that means you need to have the cash. Avoiding a stock death spiral is likely to be hard for some of these companies. Good thing they’ve all got amazing CEOs who understand the markets that they’re in and don’t just chase random buzzwords. Oh, wait.
But this is where it get’s really fun. For a long time, billionaires have avoided capital gains tax with a ‘buy, borrow, die’ strategy. Rather than selling their assets, they use them as collateral in loans, then use the loans to buy more things that they then borrow against. When they die, loans are discharged against the estate and then inheritance tax is paid on the residue. And this works really well while the assets are appreciating.
But consider One Rich Arsehole Called Larry Ellison. A large amount of his personal wealth is in shares in the company of the same name, or in things bought with loans secured with those shares. The company has just had its credit rating downgraded to borderline junk status and the stock price is dropping. If it crashes properly, the value of the collateral will drop below the value of the loans. If banks require him to sell to recapitalise, that pushes the stocks down. They may decide to be generous, but they may also decide that those other assets that he bought with the loans should be sold (perhaps to them, to avoid tanking those assets’ value) to cover the shortfall.
It’s going to be very interesting to watch folks like him try to dodge the fallout. I can’t imagine Trump stepping in with bailouts, once he realises he can bail out his own investments and cash in buy buying up underpriced assets from the likes of Musk and Ellison.
