SPAC for the Summer
What are Bill Ackman, Billy Beane, and Michael Klein up to during the summer? SPAC!
According to Financial Times' Due Diligence, out of 145 special purpose acquisition companies (SPAC) listed from 2015 to 2019, two-third of the blank cheque companies traded below its initial share price, i.e., $10. Furthermore, SPAC is on the rise with 40% of 2020 IPOs volume originated from the blank cheque company. Recently, the news of Bill Ackman starting his own 'SPAC' Pershing Square Tontine Holding (PSTH) has attracted media and investors' attention and received subscription of $4bn to buy a 'mature unicorn' or private equity-backed company. Despite the glimpse and glams of the IPO, the recent news of AIRBNB walking away from joining Mr Ackman's PSTH raised the question of whether private companies are open to the niche approach of going public. In this article, I will explore the mechanism and structures of SPAC and the drivers of its popularity.
First, here are all the things you need to know about SPAC. Investors such as Hedge Fund publicly listed a shell company through an exchange to take a private company to the public. The SPAC then will have two years to merge with a target through a reverse merger. A reverse merger occurs when the target retains its brand, and the target absorbed the acquirer into its business.
Nevertheless, the structure of the SPAC is problematic. The SPAC sponsor received 20 per cents of the shell company shares for free, which causes the dilution of shares outstanding. Next, investors received shares and warrants, and should they disagree with the proposed merger, they can withdraw their investment.
The main drivers of the blank cheque companies during the frothy period of recessions are partly the low-interest rates and partly the long-lasting private equity and venture capital. The former lower the return prospect of the bond investment and drive the bull equity market. Thus, attracting investors to park their cash on the shell company. Majority private companies might be interested with SPAC to go public without the scrutiny of Securities of Exchange Commission and time-consuming roadshows. Nevertheless, many investors hooked with the prospect of the blank cheque company merge with futuristic businesses including Virgin Galactic and Luminar Technologies Inc., in which the latter is the developer of sensor technologies behind the driverless car.
However, SPAC merger has been under scrutiny with countless of fraud and underperforming stocks. For example, Akazoo market shares, which merged with a SPAC, i.e. Modern Media Acquisition Corp., took a plunge after a report by Quintessential Capital Management shows that the company involved in an accounting fraud, whereby its 5.5 million subscribers not existed. The Akazoo management then launched an investigation and publicized that the previous administration participates in a sophisticated scheme to falsify Akazoo's books and records. Next, Nikola, another success story of SPAC, were reported to mislead it investors and the public in one of their advertisement, where the start-up roll down its truck and claim that they are on track to have the technology to mass-produced its products. The firm shares fall by more than 40%. The scenario indicates that investors should stay alert and vigilant of the SPAC returns with the risk of losing 100% of their investment.
To conclude, the prospect of high return of the private futuristic company boost by the low-interest-rate environment might drive the importance of SPAC in the future. Nevertheless, the bad reputation of the previous transactions and poor performance of the majority of blank cheque companies might tamper the trend.