FINANCE Bloomberg Businessweek August 31, 202027DE
MASI:
DMY
TECHNOLOGY
GROUP.
ACKMAN:
CHRIS
RATCLIFFE/BLOOMBERG
an acquisition that pays off big. Second is the
long-running boom in private equity and venture
capital. Investors who poured money into buy-
ing companies over the past decade want to cash
in by selling them. So there are plenty of compa-
nies for SPACs to buy. Add to these an old con-
stant: financiers looking for new ways to earn a
fee from a transaction.
The pandemic-induced market volatility in March,
which made it difficult for conventional companies
to go public, helped bring SPACs into the spotlight.
Being bought by a SPAC can be an easier way for a
private company to go public: It can skip the usual
roadshow for pitching investors and avoid some of
the scrutiny that goes with an IPO. Online sports bet-
ting company DraftKings Inc. became a public stock
in April after completing a merger with Diamond
Eagle Acquisition Corp. in a $3.3 billion deal. As is
customary in such “reverse mergers,” the SPAC took
the name of the business it bought. When the stock
price popped from around $10 a share for Diamond
Eagle before it announced the deal in December to
a peak of $43 in June as DraftKings, it helped add
to the buzz around blank check deals.
You may not be surprised to learn that there’s a
Reddit board devoted to SPACs. The boom has at
least one veteran of the industry concerned. “We’re
in silly season in SPAC-land,” says Martin Franklin,
who’s raised six SPACs in the U.S. and the U.K.
since 2006 and has another in the works. “This is
going to end badly.”
Investors seem particularly fascinated with
the latest blank checks because they’re getting
into futuristic businesses. Luminar Technologies
Inc., a Peter Thiel-backed company that devel-
ops the sensor technology behind driverless cars,
announced plans to merge with a SPAC on Aug. 24.
The Richard Branson-founded space tourism com-
pany Virgin Galactic Holdings Inc. went public via
a blank check in 2019.
But the investors who fund SPACs when they
first go public aren’t necessarily counting on
moonshots. They’re typically institutions such as
hedge funds, and the companies offer them the
combination of a relatively small downside with a
chance to make a tidy profit down the road. Blank
checks typically go public at $10 a share and have
24 months to find a target. If the company fails to
identify one, it liquidates, and investors get their
money back. Investors also get to vote on a deal
and have a chance to redeem their shares what-
ever the result. For that reason, SPACs tend to trade
around their $10 price until a deal is announced (or
sometimes rumored). In addition, the initial inves-
tors in a SPAC get warrants, which entitle them tobuy more shares at a set price after the company
makes an acquisition.
SPACs aren’t riskless, though—particularly if
you buy after a deal is announced and the stock
has soared above $10. And once a deal is finalized,
the shares can fall below that price as easily as any
other stock’s. Of the 18 companies that went pub-
lic via SPAC mergers in the past year, 11 are trading
for less than $10 a share. SPACs are partly a bet on
the skills of the sponsors who lead the companies
while hunting for a target—often money managers
or well-known executives.
Even the most prominent sponsors can have
flops. As with private equity and hedge funds,
one of the best ways to make money on a SPAC
is to start one. As part of their compensation for
finding a company, sponsors are generally able to
purchase 20% of the SPAC’s stock for a very small
amount, typically $25,000. They are also offered
warrants. That means they end up getting a chunk
of the shares of the company the SPAC acquires
for very little money. Because their compensation
dilutes the value of shares, it’s part of the cost to
a company of going public through a SPAC deal,
offsetting some of the fees it saves by not doing a
conventional IPO.
Ackman is taking a different route with his new-
est SPAC, Pershing Square Tontine Holdings Ltd. In
essence, his compensation will kick in only when
the merged company trades 20% above the offer
price. Pershing Square Tontine is the biggest SPAC
to date, having raised about $4 billion. Ackman
says he wants to buy a minority stake in a “mature
unicorn”—a private company with a valuation of
$10 billion or more.
Currently there are 120 SPACs with $40 billion
to spend, according to data from SPAC Research.
DMY Technology’s de Masi predicts that the
market will soon split into two categories: a few
top sponsors able to make attractive mergers and
everyone else.
That doesn’t mean the stars won’t have(^) competition. On Aug. 24 four software compa-
nies announced plans for traditional IPOs, and
another, Asana Inc., said it would do a direct list-
ing—that is, go public by making existing private
shares available to trade on exchanges rather than
selling new shares. Thiel’s Palantir Technologies
Inc. filed for a direct listing the next day. Investors
may soon find out whether SPACs are a new way
of doing business or just the latest shiny object in
a bullmarket.—CrystalTse
○ De Masi
○ Ackman
THE BOTTOM LINE Low interest rates, combined with a lot of
private companies looking for a fast way to go public, have turned
SPACs into the stocks of the moment.