The story out of New Zealand today is that Kim Dotcom’s new empire, Mega Ltd, is just about to float on the local stock markets at a valuation of $210 million local dollars ($180 to 190 million US). This isn’t exactly what’s going to happen despite Dotcom’s crowing about it:
After a reverse takeover deal was announced between cloud storage company Mega Ltd and TRS, an inactive local investment firm, Dotcom tweeted: “Indicted. Raided. On Bail. All assets frozen without trial. But we don’t cry ourselves to sleep. We built #Mega from 0 into a $210m company.”
No, really, just no.
Here are the details of the process:
TRS said in a statement to the New Zealand stock exchange it had a conditional agreement to buy Mega Ltd through a share issue to Mega’s shareholders, which will result in them holding 99 percent of TRS.
The plan, expected to be completed by the end of May, would see the issue of 700 million new TRS shares at 30 NZ cents each, after which TRS’s current 1.1 billion shares would be reduced to about 7 million.
For those not au courant with the mysteries of stock markets, in certain jurisdictions you’ll find companies that don’t actually do very much except sit around still listed on the stock market. This tends not to happen in the US senior exchanges (NYSE, NASDAQ) but is reasonably common in other Anglo Saxon world markets. The usual name is a “shell” company. They only have value because, if you do want to take your currently private company onto the stock market, being bought out by one of these shells is cheaper and faster than the usual IPO.*
However, the important point to note about these sorts of operations is that no money is changing hands. Therefore there’s no valuation of anything at all going on. TRS has not borrowed $210 million to purchase Mega. No outside shareholders are being asked to stump up that 30 cents a share to then be given to Mega or its current shareholders. What actually is happening is that one pile of papers marked “share in Mega” are being swapped for another pile of newly printed papers marked “share in TRS”. What number they put on that TRS share is an entire irrelevance to any valuation of Mega.
Please note that there’s nothing odd about this: reverse takeovers of shells are not fishy in any manner. There’s certainly no illegality nor even a whiff of anything other than entire standard practice. It’s simply a way of gaining a stock market listing without having the pay the fees to the IPO banks.
As to what the value of Mega really is, we’ll find out after this has all been done in late May and see where the stock trades. The market might value it at $50 or at $500 million — Who the heck knows? But that $210 million is not a valuation nor any other real number in any meaningful sense.
As to why they’re doing this I can only proffer my opinion. Given what happened to Megaupload, if I had a newly built and similar (but of course entirely different in all sorts of highly important ways) company then I’d want to take it public as fast as I could too — on the grounds that more of a stink would be made about deliberately bankrupting a listed company than a privately held one. And the wider the shareholding in it, the more secure I’d feel over any possible US action of that sort. But that is purely and solely my opinion there.
*This isn’t entirely and wholly true. The London Hydraulic Company was just one such bombed-out listed company before it was bought by Cable and Wireless, who had just won the right to wire up the city with a telecoms network and realized the network of pipes would be ideal. They even tied the cable to a waistcoat (or vest, to Americans) on a ferret then got it to run along the pipe to lay the actual cable. I kid you not.