SPAC – “Special Purpose Acquisition Company”, roughly translated as “special purpose acquisition company” – is one of the hottest trends in the US financial market today.
Do you guys wait until the actual merger comes through and actually exercise your warrants and such? Or buy and sell according to the price of the unit short-term?
WeWork – a popular tech startup, once intended to go public (IPO) in 2019, but the plan ended up collapsing because WeWork’s business model was damaged make investors skeptical. Now, the co-working space rental startup is planning to use a different way to become a public company without going through a regular IPO.
Despite a $ 3.2 billion loss in 2020 after losing $ 3.5 billion in 2019, WeWork still plans to raise about $ 1 billion by merging with a SPAC called BowX – the Financial Times reports.
Not only WeWork, recently many other companies choose to merge with a SPAC to go public instead of following the traditional way of IPO, including names such as Virgin space travel company Galactic, sports betting platform DraftKings, online real estate company Opendoor, or electric car company Nikola Motor.
Even though It was supposed to become one of the best long-term investment methods, but the SPAC “party” on Wall Street suddenly cooled down quickly in recent days – CNBC news agency said.
The SPAC fever
SPAC first appeared in the 1980s. For a long time, shares issued by SPAC were usually penny stocks. In previous years, businesses rarely used SPAC to raise capital or go on the floor.
The COVID-19 pandemic changed everything. Super low-interest rates fuel the rise of stocks, bitcoin, financial assets. Driven by greed and boredom of being indoors, millions of amateur investors poured money and meme stocks like GameStop – and SPAC regardless of the question of whether this is the best long-term investment or not?
SPAC’s boom is mainly concentrated in the US market. In 2019, 59 SPACs were established and raised USD 13.6 billion. The following year, the figure jumped to 226 SPAC and $ 83.3 billion. In the first three months of 2021, newly launched SPACs have attracted more than $ 87 billion, more than in 2020. The number of SPAC mergers is far ahead of traditional IPOs.
According to data from SPAC Research, in 2020, there are about 200 SPACs listed on the US stock exchange, raising a total of 83.4 billion USD, a record number up to that time.
And in less than the first three months of 2021, the SPAC market in the US broke last year’s record, showing an explosive growth rate.
A series of companies such as supersonic startup Butterfly Network, trial startup DA 23andMe, and media companies BuzzFeed, Vice Media, and Bustle Media … is rumored to be able to pass SPAC on the floor.
One of the most recent big acquisitions was electric vehicle maker Lucid Motors merged with SPAC of famous investor Michael Klein. Post-merger company capitalization quickly climbed to around $ 57 billion – more than Ford’s market value, Bloomberg said.
What is SPAC
In essence, SPAC is a shell company created by investors with the sole purpose of raising capital through an IPO to eventually acquire another company.
One example is the SPAC named Diamond Eagle Acquisition Corp. was established in 2019 and went public in December of the same year.
Later, this SPAC announced a merger with DraftKings and another betting platform called SBTech. DraftKings shares went public after the merger agreement was completed in April 2020.
The cycle of a SPAC usually consists of four steps:
The first step was to establish the SPAC. A SPAC is founded by a group of sponsors, usually famous investors, private equity firms, or venture capitalists.
The second step is for SPAC to conduct an IPO. At this stage, SPAC follows the usual IPO process as any business, but the SPAC sponsors do not publish specific companies they are considering acquiring, to avoid complicated procedures with Securities and Exchange Commission (SEC).
The share price of SPACs at IPO is usually 10 USD / share. When it goes public, SPAC will have stock codes and most of the money invested by shareholders will be kept in a trust account.
The third step is to find companies to buyback. SPACs typically have 2 years of searching for a private company to acquire or merge, thereby making the company a public company, because that company becomes a part of SPAC, which goes public.
This deadline can be very easy to meet, as the sponsor may already have a specific audience for redemption in the first place. However, if a SPAC does not merge or acquire a company within the first 2 years after being listed, the money will be returned to shareholders.
This makes investing in SPACs less risky than buying shares in traditional IPOs: in case the SPAC does not buyback, the investor gets money back.
Meanwhile, in traditional IPOs, there is no guarantee that stocks that investors buy will not cause losses.
And the last step is to complete the acquisition. When sponsors of a SPAC find a company to acquire, they will announce it and the deal will have to receive approval from a majority of shareholders.
The SPAC may have to raise more capital, usually by issuing additional shares, to make the deal.
When the deal is completed, the company bought will be listed on the stock exchange. Sponsors typically hold a 20% stake in the last company after a merger.
Recently, the SPAC has been in full bloom due to the high level of market volatility amid the Covid-19 pandemic. Many companies have postponed IPO plans for fear of market volatility ruining the listing, but others have turned from an IPO to a merger with a SPAC.
Merging with SPAC allows a company to both become a public enterprise and raise money faster than a regular IPO, as a SPAC acquisition can be completed in a matter of seconds. months, instead of a process that could take up to 6 months to register for an IPO with the SEC.
Additionally, during a merger with SPAC, the target company may negotiate a fixed valuation of itself with the SPAC sponsors.
Advantages of SPAC
Merging with SPAC allows companies to go public even if they do not meet listing requirements. High-profile exchanges like the NYSE or Nasdaq have very strict standards.
Merging with SPAC also allows the company to go public and access capital much faster than a regular IPO. A SPAC deal can usually be completed in 3-4 months while registering for an IPO with the US Securities and Exchange Commission (SEC) can take up to half a year.
The use of SPAC reduces the consulting and underwriting costs that must be paid to investment banks.
Also, the request for information disclosure when being listed on the SPAC is much less strict than the direct IPO. Therefore, companies that want to go public without disclosing too much information about their activities prefer to use SPAC.
The above advantages have helped the trend of using SPAC to explode in recent years.
Profits and risks from SPAC
The recent success stories related to SPAC are not uncommon in the US press.
According to Bloomberg, Mr. Denis Sverdlov – a Russian businessman who got rich by owning a telecommunications company – has expanded into electric cars.
He founded an electric truck and bus company called Arrival in 2012, and has poured a total of $ 450 million into the company by 2019. Last November, Mr. Sverdlov reached an agreement to merge Arrival into a SPAC called CIIG Merger Corp.
Currently, although no car has been produced, Arrival has been priced at $ 15.3 billion, more than double the company’s valuation at the beginning of last year.
Once the merger is completed, the net worth of Mr. Sverdlov, 42, will reach $ 11.7 billion, which means a return of 26 times the amount he invested in Arrival.
Some other SPAC deals have had quite good results. For example, billionaire Richard Branson’s Virgin Galactic stock price skyrocketed after going public.
However, Renaissance Capital pointed out that between 2015 and 2020, the average investor return from SPAC mergers was lower than in traditional IPOs.
SPAC also comes with many risks. For example, companies that want to go public through a merger with SPAC may be rejected by those SPAC shareholders. Not to mention, investors pouring money into SPAC are also very vague about what will happen next.
The process of merging a company into a SPAC requires transparency about the target company, but the SPAC’s due diligence process is not as rigorous as that of a traditional IPO, said Lloyd Blankfein, former CEO (CEO ) by Goldman Sachs Bank.
The veteran financier also said that SPAC sponsors – whose mission to find an acquisition target that is viable within two years and not necessarily the best deal – may feel no need to try. try to prevent SPAC from being “bounced” when buying target companies.
Some SPACs have done quite well, like DraftKings and Virgin Galactic shares that have both rallied since going bourse through a merger with SPAC.
However, Renaissance Capital Consulting has shown that the average return on SPAC mergers between 2015 and 2020 is lower than the average return investors get from IPOs at the same time.
As cautious as Mr. Blankfein, famous short-seller Carson Block, wrote about SPAC in a report that “a business model that encourages advertisers to do something – practically anything. – with someone else’s money often leads to a great loss in value.”
So is invest in SPAC one of the best long-term investments? It is maybe low of risks, but even smartest people feel hard to answer what happens next.
Return to the best long-term investment methods
The fever cooled off rapidly after the US Securities and Exchange Commission (SEC) introduced new proposals on accounting regulations that categorize warranties issued by SPACs as a liability. instead of equity.
If this regulation is legislated, the SPACs that are still on paper and even the SPACs that become reality will have to step back and readjust the financial calculations.
“SPAC transactions have basically stalled,” said Anthony DeCandido, RSM LLP manager Anthony DeCandido. “Having to evaluate and evaluate warrants every quarter will cost these companies more money than they did when they first opened the SPAC. Many SPACs do not have the expertise and internal competencies to do it on their own”.
After the new regulation was introduced by the SEC, many shares of SPAC were in free fall. CNBC SPAC Post Deal Index has lost its achievements since the beginning of the year, even down more than 20% compared to the level at the beginning of the year.
There have been many signs that individual investors are starting to hesitate about the SPAC. Data from Bank of America shows that the amount of SPAC shares that individual investors net bought has dropped sharply from 120 million/week at the beginning of the year to the 1-digit threshold this April.
Early April data showed that individual investors seem to have returned to traditional roots, the best long-term investment methods, according to a Bank of America report. They choose stocks of old companies over cheap securities with a high degree of speculation.