When greed stumbles upon reality cruelty and the financial bubble shattered, professional Wall Street investors often admit that they sensed the end of the day. According to them, the warning signs are so familiar, that it is difficult to believe someone might not notice. However, the truth is that history still repeats itself.
These days, American financiers are whispering about the same thing. This time, the topic covered is one of the biggest money-pickers in the business world: the SPAC companies.
As cover companies listed on stock exchanges, special purpose acquisition companies (SPAC) was established with only one purpose: to merge with real businesses, really make money. Over the past 15 months, 474 SPACs have been born, a total of them have raised 156 billion USD. There were many celebrities participating in this movement, from sports stars like Alex Rodriguez and Shaquille O’Neal; former House Speaker Paul Ryan to hedge fund mogul Michael Klein.
Businessweek called the current SPAC wave a combination of “wolves on Wall Street” and “dreamers” like small investors who blew the price of GameStop shares recently. And at the moment we still don’t know whether SPACs will be a great invention that will completely change the way the financial world works or if it’s just a bubble.
Recently, many professional investors have warned that the SPAC fever will bring tragic end to the community. The question is when will that happen and how bad the story will be. More and more members of the SPAC ecosystem – a matrix of hedge funds, private equity funds, banks, lawyers and all kinds of supporters of this model – are seeing the fever. are starting to go overboard.
Recently, the US Securities and Exchange Commission (SEC) has issued a few warnings. In the SPAC world, one side is the people who are creating SPACs and getting rich quickly, and the other side are people who are eager to buy SPAC shares in the hope of changing their lives.
What is SPAC?
SPAC is essentially a shell company founded by a group of investors with the sole purpose of raising money through an IPO to eventually acquire another company.
For example, Diamond Eagle Acquisition Corp. was established in 2019 and December of that year listed as a SPAC company. Soon after, the company announced its merger with DraftKings and betting platform SBTech. By the time the deal ended last April, DraftKings began to be traded as a listed company.
As such, SPAC has no business, no product making, and no sales at all. SPAC’s sole asset is usually the money it raises from its own IPO, as defined by the SEC.
Usually a SPAC is created or financed by a group of institutional investors, hedge fund tycoons or PE funds. Even famous CEOs like Richard Branson have “got on board” and founded a series of SPACs.
When a SPAC raises capital through an IPO, the people who buy shares do not know which company the target is to acquire. Achievement institutional investors can easily convince people to invest in things they don’t know yet. That is why SPAC is also known as “the white check company”.
After a SPAC completes its IPO, the money it raised will be deposited into a trust account until the team of founders finds a private company looking to go public through the M&A route.
After the merger, investors who have invested in SPAC can exchange shares of the company SPAC for shares of the company after the merger or return those shares and get back the initial investment plus interest. . Sponsors for SPAC typically receive about 20% of the company’s shares after a merger.
If it is not possible to find an M&A target within a set time limit (usually 2 years after the IPO), SPAC will dissolve and return the money (with interest) to the investor.
Another Covid-19 product
In essence, the SPAC model first appeared in the 1980s. However, it has recently attracted a lot of attention and has become the last option for raising capital.
The Covid-19 pandemic changed many things that SPAC is one of them. As distance work becomes so commonplace, companies cannot host traditional roadshows. Super low interest rates make everything go up in price, from stocks to Bitcoin. Driven by greed and days of boredom of being locked up indoors, millions of amateurs encouraged by social media flocked to pour money into meme stocks like GameStop and even SPAC.
The numbers paint a very clear picture. In 2019, 59 SPACs were born and raised a total of 13.6 billion USD. In 2020, the figure will skyrocket to 248 SPAC and 83.3 billion USD. Since the beginning of the year until now, only after 2 months, 226 SPAC has been established, raising $ 73 billion. SPACs account for more than 70% of all IPOs in the market.
One of the biggest recent acquisitions is electric car maker Lucid Motors merged with an SPAC founded by Michael Klein. The company’s post-merger capitalization has quickly risen to $ 57 billion – even higher than Ford Motor.
Like investment models that have turned into other bubbles such as meme stocks, dot-com bubbles, subprime debt or tulips, what makes SPAC so dangerous is greed and arrogance. . People make a ton of money and don’t realize that it’s an unsustainable road.
How are SPACs really doing?
A woman in a navy blue bikini is swimming slowly in a bubble pool. This GIF was posted on Twitter with the title: Lucid Motors – the company that will become the Tesla of the SPAC world.
The author of that article was Dr.SPAC, one of the countless social media accounts that sparked the SPAC fever. The profile picture of this account is 3 bags of money. Profile said this is an investor with more than 20 years of experience, do not forget to add that the articles are “for entertainment purposes only”. But this account is followed by a lot of people, including hip hop artist Cuvée, who composed an entire song about SPAC.
There are also accounts such as SPAC Tiger, SPAC Guru, SPACzilla and Bill SPACman (billionaire Bill Ackman recently also set up a SPAC whose shares rose 30% after the IPO, while still looking for a target for M&A). .
6 months ago, SPAC Guru only had 1 follower on Twitter but now it is over 75,000. This character refused to reveal his identity because he said that netizens are difficult to predict and can “go crazy”, but also shared that he is a retired investment banker and every day sitting in front of 9 Computer monitor, manage categories for yourself, your mother and your son. On Twitter account, SPAC Guru regularly shares knowledge about SPAC, from articles on Harvard Law Review to legal documents.
He said his followers made enough money to pay off mortgage, credit card debt and send their kids to college. However, it seems that history is not on the side of the novice investor. According to Bain & co, 60% of the SPACs that were M & A in the 2016-2020 period lagged behind the growth of the S&P 500. As of the end of January, about 40% were trading below the starting price.
Of course there are still some much more successful SPACs, for example DraftKings shares have risen nearly 450% since the announcement of the SPAC deal at the end of 2019. Many companies, however, have had bad results. . Some SPACs have gone bankrupt.
The SEC has repeatedly warned about risks from the SPAC model in recent months. When the 2-year deadline expires, founders will want to do M&A rather than return money to investors, and they will be very sloppy when looking for opportunities, leading to major mistakes.
According to Greg Belinfanti, director of One Equity Partners, when the investment climate returns to normal, SPAC will lose its attractiveness, be overshadowed by IPOs or anything new.
“Anything that hits the current bull market will knock the SPACs first. SPACs will be first,” said Steven Siesser, a lawyer at the Lowenstein Sandler law firm.