14 BARRON’S August 3, 2020
could be the next hot stock is tempting.
For retail investors, it may be the
closest thing to being a venture-capital
or private-equity investor—without
knowing what the target company will
be. SPACs go public as just cash shells,
with the goal of later combining with
operating businesses, which become
publicly traded companies after the
mergers close.
Individual investors need to be
choosy, judging SPACs on how share-
holder-friendly their terms are and
how comfortable they are piggyback-
ing on an experienced deal maker.
“This industry has morphed into
something much more institutional-
ized,” says David Sultan, chief invest-
ment officer at Fir Tree Partners, a $2.
billion hedge fund that began investing
in SPACs in the mid-2000s. “Aside
from better sponsors, you now see
plenty of marquee hedge funds and
long-only guys investing, and every
major bank underwrites SPACs. That
doesn’t mean there won’t be cycles—
we’re definitely in a frothier period—
but I think SPACs are here to stay.”
The biggest name to start a SPAC
this year is silver-haired investor Bill
Ackman. His hedge fund,Pershing
Square Capital Management,is the
sponsor ofPershing Square Tontine
Holdings(PSTH.U), the largest-ever
SPAC, having raised $4 billion in its
offering on July 22.
Ackman made his name as an ac-
tivist investor swinging for the fences.
He took big stakes in companies and
pushed for changes in strategy and
management, at times with great suc-
cess (Canadian Pacific Railway and
General Growth Properties), and at
times not (J.C. Penney.)
Now, Ackman could have a SPAC
war chest of as much as $7 billion
when other commitments from Persh-
ing Square funds are included. He
plans to pursue a minority position in
a “private, large-capitalization, high-
quality growth company” that can
then bypass the traditional IPO route.
Ackman sees “mature unicorns”
as attractive targets, referring to often
venture-capital-backed tech compa-
nies that have ballooned to large
valuations and moved past the peak
loss-making stage of their growth.
“We want one of the great busi-
nesses of the world that we’re happy
to own for a decade,” Ackman tells
Barron’s. “We’re a unicorn looking to
marry another unicorn.”
A guessing game of what Ackman
could buy has been making the
rounds on Wall Street. Giant unicorns
like home-sharing upstart Airbnb and
data company Palantir Technologies
are among the names most speculated
about for a merger, as is financial in-
formation behemoth Bloomberg.
Whichever it is, Pershing Square
Tontine’s terms will give the SPAC an
edge in getting a merger done, Ack-
man contends. Its units have climbed
8% from their IPO price to $21.65.
“We’ve always thought the SPAC
structure was a great idea that was
missing something in its ultimate exe-
cution,” he says. “The problems really
lie around alignment of incentives.”
Other recent SPACs have empha-
sized attracting long-term investors,
aligning sponsors with shareholders,
and reducing dilution to strike better
deals with target companies.
Fifty-five SPACs have already gone
public this year, raising $22.5 billion in
proceeds—with another 22 SPACs on
file to IPO in the coming weeks, ac-
cording to SPAC Insider. That com-
pares with 59 IPOs and $13.6 billion
in proceeds in 2019—both previous
records. More than 100 SPACs are
currently on the market, with close
to $40 billion in their war chests.
Here’s how a typical SPAC works.
It goes public by selling $10 units con-
sisting of a common share and a frac-
tion of a warrant—essentially a call
option—which split and begin trading
separately within a few months after
the IPO. The cash raised goes into the
SPAC’s trust, where it earns interest
until the SPAC completes a merger
with an operating business. (SPAC
shareholders vote on the merger.)
Typically exercisable at $11.50 after
the combination is completed, the
warrants are a sweetener for IPO
investors in exchange for locking up
their cash as sponsors seek a target.
SPAC sponsors may invest along-
side shareholders, but more often they
tend to buy founder shares or war-
rants for close to nothing—known as
their “promote”—which can give them
as much as 20% of a SPAC’s common
shares soon after a deal closes.
If a SPAC doesn’t complete a deal
before its deadline—often two years
after the IPO—the trust is liquidated
and funds are returned to shareholders,
while the warrants expire worthless
and sponsors lose their at-risk capital.
At the time of the merger, shareholders
can also elect to redeem their stock for a
proportionate share of the cash in the
trust. That option means that downside
for shareholders from an unattractive
merger proposal is limited, but that
SPACs can sometimes be left without
cash to complete deals.
“The way I’ve always thought
about SPACs is that it’s a downside-
protected investment,” says Yoav
Roth, managing partner and co-
founder of Hudson Bay Capital, a
longtime SPAC investor with over $
billion in assets under management.
“If I don’t like the proposed business
combination, there’s a way for me to
get my cash back. But if the deal is
exciting, then there’s some upside.”
Not every SPAC merger is a suc-
cess. Alta Mesa Resources, which
merged with Silver Run Acquisition
Corp II—at the time the largest U.S.
SPAC by IPO proceeds and backed by
former Anadarko Petroleum CEO Jim
Hackettand Riverstone Holdings—
filed for bankruptcy in September.
The most frequently cited criticism
of SPACs is that sponsors are more
interested in getting any deal done,
rather than getting a good deal done.
Even if postmerger shares drop signif-
icantly, sponsors can walk away with
millions of dollars in profit, thanks to
their close-to-free promote shares
vesting soon after the deal closes.
And even for a well-received
merger, the resulting dilution can still
be significant, reducing the reward for
other shareholders and presenting a
sticking point in negotiations with
target companies.
Pershing and other sponsors aim to
be different. Its funds paid $65 million
for warrants that can eventually be
used to acquire about 6% of shares
outstanding, but not until three years
after the merger closes—and exercis-
able at a 20% premium to the IPO
price. It is an incentive to get a deal
done, but not a huge sum relative to
Pershing Square’s $10 billion in assets
under management.
“There’s no scenario in our struc-
The New IPOs
There has been a
rush of SPACs
this year.
55
2020 SPAC IPOs
$22.5 B
2020 SPAC IPO
funds raised
22
SPACs on
file to IPO
103
SPACs currently
searching
for targets
31
Deals announced
in 2020
Sources: SPAC Insider,
SPAC ResearchSPAC Attack
Here are some notable SPACs that have gone public recently and, below, some prominent SPAC mergers
Selected Premerger SPACs IPO
Recent Proceeds Warrants Other
SPAC / Ticker Price IPO Date (mil) Per Unit Committments
Pershing Square Tontine Holdings/ PSTH.U $21.65 7/22/20 $4,000 1/9 + 2/9 $1-$3 billion
GS Acquisition Holdings/GSAH.U 10.65 6/30/20 750 1/4 --
Therapeutics Acquisition/ TXAC 14.03 7/8/20 136 0 $25 million
Social Capital Hedosophia Holdings II/ IPOB 11.68 4/28/20 414 1/3 --
Social Capital Hedosophia Holdings III/ IPOC 10.85 4/22/20 828 1/3 --
Selected Post-SPAC Merger Companies Performance Performance
Recent Merger Since Merger Since
Company / Ticker Price SPAC Predecessor Announcement Announcement Closing Closing
Virgin Galactic Holdings/ SPCE $22.97 Social Capital Hedosophia Holdings 7/9/19 115% 10/25/19 95%
Vertiv Holdings/ VRT 14.00 Goldman Sachs Acquisition Holdings 12/10/19 32 2/7/20 9
DraftKings/ DKNG 35.89 Diamond Eagle Acquisition 12/23/19 231 4/23/20 105
Nikola/ NKLA 31.23 VectoIQ Acquisition 3/3/20 172 6/3/20 -
Data as of 7/29/20 Sources: SEC filings, FactSet