Build it…They Will Come
One would have had to have been living under a rock to have never heard of the SPAC mania…or, at least, not a market participant. Also known as “blank-check companies”, SPACs (or special-purpose acquisition companies) are publicly traded companies whose sole asset is cash. That is right: no inventory, no receivables, no goodwill or other intangible assets or even a business plan…just cold cash. SPACs exist solely to buy private companies, taking them public while circumventing the usual compliance requirements of a traditional initial public offering (IPO). The private company purchased then takes the place of the SPAC on the exchange.
It appears everyone and their mother has been getting in on the SPAC mania, from some of the biggest banks on Wall Street to tech entrepreneurs to celebrities like Serena Williams. Apparently, FOMO (fear of missing out) is a real thing. Some of the more popular companies of which you might have heard, if you have not heard the acronym “SPAC”, have been taken public via SPACs…including DraftKings, Inc. and Virgin Galactic Holdings. SPACs have been so hot that even troubled, formerly overhyped darlings like WeWork is attempting to revive its miserable, profit-less fortunes by way of a SPAC.
To provide some context concerning just how big the SPAC market has gotten, let us look at the actual numbers. As of March 29, 2021, SPACs have raised nearly $95 billion, eclipsing last year’s record total in just a span of three months. In addition, SPACs account for about 70% of all IPO’s this year.
Whenever I learn of Wall Street’s latest invention or incarnation (to be fair, SPACs have been around for decades)—and there is a never-ending pipeline—I cannot help but think, “There they go, again.” Without painting with too broad a brush, there are a few reasons average investors should avoid SPACs altogether.
When a company tells you who they are…believe them. Any attempt by a company to explicitly circumvent SEC compliance rules concerning initial public offerings should be a red flag. The rules, cobbled together by financial and accounting experts after decades of practical work in the field and thousands of hours of research related to the failure of public companies and market consequences, are in place for a reason, to promote transparency, accountability, and honesty in reporting. Companies having such qualities as integral to its mission, do not seek to aggressively skirt the rules. Moreover, such companies do not shun such corporate ideals as a private enterprise only to, suddenly, swear wholeheartedly by them as a public company. They are who they are.
“WHEN A COMPANY TELLS YOU WHO THEY ARE…BELIEVE THEM.”
Next, imagine you encountered a man on the street, and he asked you for a $100, implicitly guaranteeing that you will get more back in exchange at a later, undetermined date as a result of a yet-to-be determined bet with previously unknown characters. You would immediately look at such a man as if he had a third eye, burst into laughter at his chutzpah, and walk away shaking your head. Buying into a SPAC is no different. In many cases, SPACS, already with no underlying business, offer little to no information regarding future deals in which it might engage. This begs an interesting question: who is crazier…the man on the street asking for the $100? Or the person who gives it to him? I will let the reader answer that one.
By the way, some of the same Wall Street banks (and their subsidiaries) that are eager to pitch SPACs to the average investor will quickly reject your small business loan application in the absence of a business plan. Imagine that. According to SPAC Research data, some 435 SPACs, to date, are still seeking a merger target.
The current SPAC mania is reminiscent of the dot-com era boom-and-bust. In those days, the clairvoyants of Wall Street aggressively touted the prospects of companies with very little revenues and, in many cases, no profits at all. By the dawn of the new millennium, a great majority of the companies touted no longer existed. Here, the clairvoyants are at it again, aggressively touting shell companies with no products, revenues, or profits. Some might argue this is worse than the dot-com era.
Another reason to avoid SPACs: they simply do not perform very well. SPACs have a debut price that is typically set at $10 (designed to draw in throngs of unsuspecting individual investors), and they generally revolve around that price level, at least until the SPAC announces which company it will take public…when, and if, it happens. Since February, however, it has been common for SPACs to fall below their debut price on their opening trading day. Yes, I am aware; there have been instances where the prices have risen materially above its debut price, but those are exceptions.
Finally, if Wall Street is enamored with an idea, the average investor should run in the opposite direction as quickly as humanly possible. As Warren Buffett would strongly advise, “Be fearful when others are greedy.” And right now, Wall Street is as greedy as ever when it comes to SPACs. Much like its traditional IPO cousin, SPACs work to perfection if you are an insider or underwriter. As usual, however, Wall Street buzz words almost always become a buzz saw for the average investor, to paraphrase the notable columnist Jason Zweig.
In the meantime, SPACs will continue to have their moment as the newest building on the block, attracting all manner of tourists. Rickety foundation be damned.
I.D. Amandah