nisiprius wrote: ↑Mon Jan 09, 2023 4:01 pm
Matt Levine's latest MoneyStuff column, which I receive via a no-cost email subscription from Bloomberg, is entitled
SPAC math no longer adds up. I think this is a key passage:
The argument above is loosely based on a well-known 2020 paper called “A Sober Look at SPACs,” by Michael Klausner, Michael Ohlrogge and Emily Ruan. From the abstract:
We find that costs embedded in the SPAC structure are subtle, opaque, higher than has been previously recognized, and higher than the cost of an IPO. Although SPACs raise $10.00 per share from investors in their IPOs, by the time a SPAC merges with a private company to take it public, the SPAC holds far less in net cash per share to contribute to the combined company. For SPACs that merged during our primary sample period of January 2019 through June 2020, mean and median net cash per share were $4.10 and $5.70, respectively. Between June 2020 and November 2021, net cash per share was somewhat higher but far below $10. We find that SPAC costs are not born by the companies they take public, but instead by the SPAC shareholders who hold shares at the time SPACs merge. These investors experience steep post-merger losses, while SPAC sponsors profit handsomely.
One of the authors just successfully sued a SPAC, arguing that
Part of the information GigCapital3 shareholders didn’t receive was that the shares the SPAC used to purchase Lightning eMotors were worth around $5.25 per share—not $10, according to Will.
“If Gig3 had less than $6 per share to contribute to the merger, the proxy’s statement that Gig3 shares were worth $10 each was false—or at least materially misleading,” she wrote. “Moreover, Gig3 stockholders could not logically expect to receive $10 per share of value in exchange.”
Levine opines
“Gig3 stockholders could not logically expect to receive $10 per share of value in exchange.” But that’s just logic. There is some practical sense in which, in like 2020, the answer was pretty much “ehhh there is enough value to go around here, it’s fine, everything goes up, don’t worry about how much the sponsor is getting paid or who’s paying them.” Now things are tighter, and there is reason to worry.
Good piece.
In the London Stock Exchange, SPACs are known as "shell companies". Various entrepreneurs would attract followings in the City of retail investors and fund managers, and do deals using them. This was very much the 1970s and 1980s, they were heavily cracked down on, particularly in the post dot com period.
"When playing poker, if you haven't figured out who the mug is in 5 minutes, then you are the mug". (If you ever saw the exquisite film
Molly's Game that's one of the things that becomes obvious
https://www.imdb.com/title/tt4209788/ ).
In other words this is a situation with asymmetric information and you, the retail investor, are the one with less information.
If it's a way to achieve an IPO with fewer IPO rules (put in place to protect investors) and less due diligence, why should I want to participate in this? Particularly knowing that IPOs are asymmetric - they underperform, on average, post 1st day trading.
The companies so listed via SPAC are likely to be less mature and of lower quality, on average, so why as an investor (playing the law of averages) should I want to participate?
I believe the various index providers have rules about when these post-SPAC companies are incorporated into the index, to prevent a front-running position where hedge funds etc know it will be included into the index, so buy in advance of that and sell to index funds when the stock is included.
From memory the bubble in SPACs was in early 2021. I think like a lot of phenomena (Gamestop), and the general rush to ecommerce, a big factor was people sitting at home with too much time on their hands. Watching stocks go up and down. It all felt very early 2000 dot com era-ish.
Having just made a major household purchase at an actual, live retail outlet -- look and feel is still important -- I can see how that was overdone.