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‘SPAC’ Easy..?

In the previous article, we touched on what makes an Initial Public Offering (IPO), an (IPO) and the intricate labyrinth of regulatory red tape a listing company has to go through in order to set foot in the promised land. There is however another option that we will visit in this article that has somehow garnered a lot of attention and has been getting more scrutiny in large thanks to the surprise cases that have been coming up in Bloomberg, CNBC or even Forbes over the past few years of companies, will call them duds, that have ill-performed shortly after getting listed.

Now, ‘Special Purpose Acquisition Companies’ (SPAC’s) don’t have to follow the same rigorous waltz as stated in our previous article when going public. The process is rather shortened and this is in large part to the fundamentals of a (SPAC). Now these ‘vehicles’ are companies without commercial operations, formed strictly to raise capital through an (IPO) for the purpose of acquiring or merging with an existing company. They are sometimes coined as ‘blank cheque companies’ because their whole premise is reliant on acquiring or merging itself to another company in order to complete the (IPO) process.

The Boom!

(SPAC) shares are structured as trust units with a par value of $10 per share set on the date of the (SPAC’s) (IPO). Market forces then take hold and move the needle in either direction. 2020 and 2021, were record years for (SPAC) (IPO) filings, 613 to be exact which was a significant boom from the 59, in 2019.

The process is rather straightforward in that once the (SPAC) has raised sufficient capital through the (IPO), it uses the funds to search for and acquire a private company, which is then taken public through a reverse merger. This allows the private company to access the public markets and raise additional capital without going through the traditional (IPO) process. That is it’s allure. Some success stories that made their mark using this vehicle are DKNG that is up 301.84% from its (SPAC) (IPO) listing through a reverse merger with SBTech and the (SPAC), Diamond Eagle Acquisition Corp in April 2020. Another success story, at least presently, is the former President of the United States, D. Trump's company, DJT, has seen its share price sit at $36.73, which is slightly down from it’s $65.30 peak on the day it became a public company on March 26, 2024 after merging with the (SPAC), Digital World Acquisition Corp.

Lacklustre Realities…

The valuation of (SPACs) has largely stayed under the $2 billion mark according to analytics, with the largest (SPAC) (IPO) to date being CCIX, having raised $1.8 billion on it’s (IPO). Which is a far cry from plenty of other traditional (IPOs) figures we are used to. Coupled with a generally declining appetite for ‘riskier’ blank cheques, as not knowing what company will be merged with or acquired, tends to slide the risk barometer, past the favourable mark for most conservative investors.

How about we have a go at the backyard marshes and wade our way past some of those duds we mentioned earlier. Instances like the NKLA (SPAC) that went public on the 4th of June, 2020. I’m sure we just incited a couple uncomfortable flashbacks with that one. With a once stratospheric share price of $93.99 on the 9th of June, 2020, a few days after the General Motors deal was announced. To a jaw dropping current share price of $9.65. We will avoid placing the market cap erosion percentages for these ones for sanity’s sake. Then we have SPCE that reached a peak share price value of $62.80, back in February, 2021. But now sits a humbling $7.55 a pop, post its lofty ambitions of rivalling SpaceX.

How about a more recent one? WEWKQ, the infamous office-sharing firm, recently filed for chapter 11 protection. After a little more than two years as a public company and yet in March 2021, the company reached a deal to become a public company via a (SPAC) with a $9 billion valuation and merged with BowX Acquisition Corp. Now the share price is a dismal $0.06. We will let that one simmer a bit.

Our ‘2 Cents’ On The Trend...

The track record for (SPACs) hasn’t done most any favours, with those core business fundamentals that validate a businesses going concern, still needed, over and above the hype of going public. Once the internals of the acquired business go through scrutiny and don’t live up to the expectations sold on by the (SPAC), market forces will deliver the all certain death blow.

With their reputations getting mired even more, the heights seen in 2021, may be a distant memory, at least for now, with the traditional IPO route or even a direct listing, in the ‘possible’ case of Stripe Inc., hint-hint, like some of the legends who took that route, WORK and SPOT, that have done extremely well. Our recommendation, do your due-diligence when a blank check lands in your mailbox, simply put.