SPACs merge into the public lane for the long haul

A good deal of the financial world’s attention, and that of entrepreneurs on the one hand and investors on the other, has turned as of late to the use of blank check companies as a means of going public. Whether it is Bill Ackman’s $4 billion SPAC that was the largest ever to go public or the largest SPAC IPO of common shares that was Therapeutics Acquisition, there is no turning back in 2020 -- which is now been dubbed the year of the SPAC. SPACs aren’t all that new though. They already existed in the 1990s, but as founder and CEO of InterPrivate Acquisition Corp. Ahmed M. Fattouh put it in a recent interview, times were different then. One “characteristic of the blank-check system at that time was that when a SPAC would tell its institutional investors the merger it wanted to make, the investors had a single yes/no choice: redeem their investment, or agree to the deal and keep their money in,” explains Fattouh, whose SPAC IPO raised $210 million in February. “It has only been a recent development that the right to redeem and the vote for a particular deal have been separated.” Fueling a SPAC boom That change has made things a lot easier for the entrepreneurs who want to take this route, so it has helped fuel a boom. There are a lot of reasons for the new attention being paid to SPACs. One of these is simply that the traditional IPO process has become a pain in the neck. Back in the 1990s there were 5,724 IPOs. In the first decade of the new millennium there were just 2,106. In the second such decade (2010 - 2019) that was just a tad higher, 2,163. This means that in a 20-year period starting with 2000 the total IPOs were 1,455 less than in the 10 years before that. The reasons why the IPO fell out of favor, especially for smaller enterprises, are complicated, and are not our subject today. What is important to remember is that status as a public company, with the hyper-liquidity of shares that comes with that, remains desirable, so as the IPO route has become obstructed, the blank check route has gained in appeal as another means to that end. This involves arranging for purchase by a special purpose acquisition company (SPAC) which itself is already listed and exists just for this purpose. According to a recent analysis by Bloomberg Law, the aggregate value of company takeovers by SPACs publicly traded on the US exchanges totaled $32.4 billion in the month of September 2020. That is 21% of the total value of company takeovers in the month. Looking at the third quarter as a whole, 44 deals involving SPACs as acquirers were announced, with a value of $50.9 billion, or 17% of the total takeover pie. Who invests in the SPACs? And (since they are blank checks before the sponsors decide on a deal … how does someone decide to invest in one)? Typically, a SPAC may be organized around a big name -- for example Ackman, or Chamath Palihapitiya. Or…not. Either way, it may hold a road show and pitch in the old-fashioned way before getting its own listing. Who invests? A variety of institutions. Fattouh says that “hedge funds come to the table with different goals depending on their strategies” and that InterPrivate’s investors include “fundamental hedge funds on the one hand and arbitrageurs on the other.” As for InterPrivate, it has a range of investors with various time horizons, including both hedge funds (of both of those descriptions) and long-only funds. Something else that has helped fuel this boom: the investors get common shares. A late-stage start-up looking for a new infusion of capital may consider remaining private and looking to private equity or venture capital. One big problem there, though, is that the PEs and VCs will want a preferred position. As Lewis Hover wrote recently on the website of SVB Financial Group, “In most cases, VCs today won’t hand over a dime in exchange for common shares….” What that means exactly is a matter of negotiation. But at the very least it indicates that if things go badly and the enterprise is liquidated, the founders and employees take the hit and they often watch the preferred investors walking off with their money back or a small gain. Sometimes the preferred status also comes with anti-dilution clauses that limit later corporate financing decisions. The point, though, is that if the late-stage firm does choose to go public, it gets new common shareholders, and that is often attractive. The need for due diligence Then there is Nikola. Whenever the definitive financial history of 2020 is written, Nikola will have a place. Not as capacious as the space that will be given to the pandemic, say, or even Wirecard. But it will have a place. The dramatics involving the electric truck company after its reverse merger with VectorIQ Acquisition Corporation (VTIQ) put a media spotlight on special interest acquisition companies (SPACs) like VTIQ. What happened, in short, was this: In March 2020, Nikola announced its plans to merge with VectoIQ Acquisition Corporation (ticker VTIQ), run by former General Motors Co. executive Steve Girsky. On June 2, VTIQ’s shareholders voted to approve the deal, and the following day, the resulting company, now with the ticker symbol NKLA, began trading. The issuer received hundreds of millions from a related PIPE transaction where investors such as P. Schoenfeld Asset Management and Fidelity bought shares at a discounted price. At closing June 9, the value of the shares had reached $79.73. Soon thereafter, though, signs that CEO Trevor Milton had over-hyped the company’s product came to the market’s attention. On September 10, a short seller blasted away with detailed claims of deceptive practices by the company. Within two weeks, the stock price was below $20. The Securities and Exchange Commission is investigating the claims and counterclaims of the short seller, Hindenburg, and Nikola. Milton has left the board. From the point of view of understanding SPACs, their management teams/sponsors, and relatedly PIPEs, though, one need not take any view at all of the roller coaster in the public markets, its causes, or whether anything illegal counted among them. The key point is that investors were buying at a discount to the initial listed price, through a PIPE. If they were buying at $10, a standard price in such deals, then even a $20 value now represents a profit. Furthermore, as Fattouh adds: "A sponsor is compensated to conduct private equity level due diligence regarding non-public material facts. The sponsors should of course do a deep dive concerning, for example, whether a company's products perform as claimed or whether the commercial assumptions are reasonable.”

SPACs merge into the public lane for the long haul

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