What is a SPAC?
- A SPAC is a special purpose acquisition company (SPAC) with no commercial operations that is formed strictly to raise capital through an IPO (see definition below article) for the purpose of acquiring an existing company.
- Also known as a blank-check company.
- SPACs provide private companies with a non-conventional (becoming more conventional) way to file for IPO
Pros and Cons of SPACs
- Pros- For the Company:
- Potentially quicker IPO process
- Less risk around market sentiment
- Adds $ to the sale price, compared to a typical private equity deal
- Pros- For Investors:
- High potential gain (if the SPAC plays out as intended)
- Early entry into a new player in the market; could give the upper-hand on initial trading of the stock (Beneficial for both the public and the company – sometimes on the day of the IPO, stocks have some “lag” time as to when the public can purchase the stock. With a SPAC, this “lag” is essentially removed, and the stock’s ticker is converted from the SPAC to the IPO of the formerly private company).
- Fun, risky investment – Although SPACs are risky, some investors may see that as a place to have some fun. Contrary to passive traders, some get a kick out of the suspense-filled, aggressive trading, which can sometimes be correlated with SPACs. Since there is a high risk, high reward factor, some may see it as an opportunity to have some fun and keep their adrenaline up, while simultaneously making a hefty gain on their original investment.
- Cons- For the Company:
- May not properly reflect the excitement or interest that investors have in the company. (For example, if a company like SpaceX said they were going to go public, it would be circulated across multiple forms of media and the public would most likely show an immense amount of interest for the IPO. However, if SpaceX were to work with PSTH or another SPAC for their IPO, there may not be as much knowledge or publicity around it, skewing data on the public’s perception of the IPO (nothing we should have to worry about considering SpaceX’s capital)).
- Bubble: Also a con for investors, bubbles (definition at bottom – see example for CCIV) can falsely illustrate a SPAC’s worth and unintentionally mislead everyday investors. When a bubble occurs, the SPAC’s value may be inflated by the volume of shares being purchased, often by investors trying to drive up the price. When this bubble pops, however, the stock’s share price sinks, leaving investors in the red and scratching their heads wondering where they made a mistake.
- Cons-For Investors:
- No “money back guaranteed” – Institutional investors are allowed an easy exit of a SPAC if they don’t agree with the merger choice or don’t think their share price will go up. However, everyday investors aren’t given that same benefit, and although they can sell their shares if they aren’t happy, there’s no telling if the stock and stock price have already suffered by that point.
- Suspense and Lack of Knowledge: A large part of a SPAC deal is waiting, whether that be for the IPO date or for the SPAC itself to decide which company they will merge with. With this, as seen by the latter portion of the statement, leads to a lack of knowledge by everyday investors and sometimes can spark some panic if they begin to question whether the merger will actually happen or not.
- Risk: If the SPAC doesn’t work out, there is potential for large losses, as described in the “For the Company: Cons” section.
SPACs come in all shapes and sizes; some work, others don’t
- Celebrity SPACs: As SPACs have gained more publicity and legitimacy over the past few months, more and more celebrities have been looking to take part in the action. However, just because a celebrity is involved in a specific SPAC doesn’t mean it has more legitimacy or long-term potential, so be weary when choosing which SPACs to possibly invest in.
- Celebrities often have the ability to sustain a larger loss if something goes awry, but that isn’t always the case for everyday investors such as ourselves.
- SEC Warning on Celebrity SPACs
- CCIV Bubble
- Saw a surge at the beginning months of Covid because people realized they wouldn’t be able to gamble/bet in casinos for a while.
- DraftKings -Launch
- DraftKings -SPAC Merger
- Fisker -SPAQ Merger
- Pershing Square Tontine Holdings is a middle-road example of how SPACs have resulted over the past few months and may give insight into what could potentially happen in the future.
- Over the past few years, Ackman has made a name for himself on Wall Street and in the banking world. When Covid hit, Ackman riskily shorted the market (bet that it would go down) and assumed the economy would take a significant hit based off the current structure of the market and the reaction that the pandemic was receiving globally. Was he right? Well, let’s just say his bank account is looking much nicer today than it was two years ago.
- Bill Ackman -Reddit
- Bill Ackman -Stocks
Things to Look For/ How to Identify a Good SPAC
- Timing: As we saw with DraftKings at the beginning of Covid in March 2020, the timing of SPACs is just as important as any other factor…
- SPAC: A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. (Investopedia)
- A special purpose acquisitions company is essentially a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company. (CNBC)
- IPO: initial public offering; an IPO is a stock’s first, or initial, public offering (of a formerly private company) on a trading platform to outside/public investors. This allows a company to raise capital form public investors.
- Institutional Investors: An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street. The group is also viewed as more sophisticated than the average retail investor and, in some instances, are subject to less restrictive regulations. (Investopedia)
- Bubble: A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a “crash” or a “bubble burst.” (Investopedia)
- Typically, a bubble is created by a surge in asset prices that is driven by exuberant market behavior. During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset). (Investopedia)
- Short: Short selling is an investment or trading strategy that speculates on the decline in a stock or other security’s price. It is an advanced strategy that should only be undertaken by experienced traders and investors.
- Traders may use short selling as speculation, and investors or portfolio managers may use it as a hedge against the downside risk of a long position in the same security or a related one. Speculation carries the possibility of substantial risk and is an advanced trading method. Hedging is a more common transaction involving placing an offsetting position to reduce risk exposure.