- It is a boom time for SPACs, which provide startups with a way to go public without the IPO bureaucracy.
- Retail investors see SPACs as a chance to get into the next Apple or Google soon.
- The big winners are CEOs and celebrities who make money mainly by lending their names to SPACs.
- Visit the Insider Business section for more stories.
A debate is raging on Wall Street and Main Street over SPACs, the flavor of financial engineering at the moment. Depending on who you ask, these so-called blank check companies – funds raised for the sole purpose of buying a business and opening it – are the latest quick-get-rich scheme for financial quacks or the biggest innovation in the capital markets in years .
Let’s dispense with a little drama immediately: both positions exaggerate. That said, precisely who is going to make money here – hint: not the ignorant masses – is the best. SPACs, short for special purpose acquisition companies, are a divine gift hidden from sight of all bankers, lawyers, capital-hungry entrepreneurs and, critically, those privileged few who are already extremely well connected and can profit by simply lending their name to a project.
At the same time, SPACs are neither new nor particularly innovative. They have been around for years, although they have mostly been attributed to a darker corner of the financial sector. Still, it is still worthwhile to understand why they are suddenly in fashion – and who will get hurt when the furor inevitably subsides.
The organizers of a SPAC ask investors to give them money to form a listed company on the stock exchange. These sponsors, who normally invest a modest amount while granting themselves 20% of the shell, then look for a privately held target company that would like to go public. It is an opportunity for investors to achieve high returns in an era of ultra-low interest rates. And for target companies, especially those that would otherwise have had difficulty going public, it is a quick route to an initial public offering. Virgin Galactic, DraftKings and, more recently, the genetics company 23andMe and the Rover dog walking app, agreed to be purchased by a SPAC.
In short, a SPAC is like a pop-up private equity firm, but without a diversified portfolio. SPAC makes exactly one investment and then leaves, a process known as “de-SPACing”. The risk is that as more and more SPAC businesses are raised, each will have fewer companies to choose from. Last year, 248 SPACs raised $ 83 billion, according to SPAC Research, a cool Chicago company that is becoming something of a Bloomberg terminal for the SPAC world. This year, there were another 134 SPAC businesses that raised US $ 42 billion. Before last year, there were less than 200 businesses in the past seven years combined.
Software entrepreneur Aaron Levie joked the other day on Twitter: “Little known fact: We achieve uniqueness when there are more SPACs than real companies.” There is healthy development at stake here. In an era that ended with the dot-com bubble burst in 2000, companies went public at much earlier stages of their development than ever since. Apple, Microsoft, Amazon and others have given retail investors the opportunity to enter relatively early.
SPACs, however flawed, are giving investors this chance today. Consider a deal this week in which Alta Crest, a SPAC overseen by veteran investment banker Ken Moelis, injected $ 1.1 billion into a flying taxi manufacturer in Palo Alto, California, called Archer Aviation. United Airlines, which is also investing, announced an order for $ 1 billion in Archer aircraft, with the goal of creating a short-haul taxi service between airports. The downside: Archer does not intend to start delivering its high-quality planes until 2024, which is also the first year it plans to have revenue. This is as early – and speculative – as possible.
And that is the problem. SPAC investors are picking up a brochure. (Literally, in the case of Archer.) As for those who are simply following, consider the growing number of established executives and other prominent people sitting on boards or advising SPACs. This group can earn hundreds of thousands of dollars without doing so much work.
For example, a SPAC called Forest Road Acquisition associated with former Disney bigwigs Kevin Mayer and Thomas Skaggs is buying up the renowned fitness company Beachbody. His advisers also include basketball star Shaquille O’Neal and human rights defender Martin Luther King III. Stanford professor Fei-Fei Li and Kristina Salen, chief financial officer of World Wrestling Entertainment, are on the team that advises the SPAC initiated by entrepreneurs Reid Hoffman and Mark Pincus. And Vy Global, the SPAC offshoot of a venture capital firm, has Facebook executives Hugo Barra and Javier Olivan, as well as Reddit CEO Steve Huffman as its directors. (A different Vy fund recently invested in Reddit, which led some members of the Reddit board on Wall Street Bets to wonder if Vy’s SPAC would buy the entire company.)
It is not as if these people do not add value. Certainly, only your networks are useful for raising money. Some also invest alongside the founders of SPAC. But they all have full-time jobs, making this the latest “sideways move” for those already well off.
It is more or less obvious how it will all end. Good business will result in bad business. The volume will dry up as interest rates rise. Some companies will achieve greatness, while many others will vaporize when the bubble bursts.
And financial engineers and those who serve them will move on to the next new thing.
***
The Wall Street Journal reported on Wednesday that the purchase of TikTok by Oracle, Walmart and others was on hold indefinitely. In my first Insider column, on November 13, I noted that the deal made sense for Oracle, which is struggling to build a cloud business to compete with Amazon, Microsoft and Google. But the deal was bad policy from the start, as it was a whimsical dictate of a transactional president looking for “key money” for his problems. I said at the time that the deal was likely to wilt under the Biden government. I was told that Google, not Oracle, remains TikTok’s cloud provider.
***
Is it just me or has Twitter become immeasurably more enjoyable since removing the 45th president of the United States? I am finding my feed interesting, informative, fun and totally civilized today. You?
Adam Lashinsky is a Business Insider contributor and former executive editor of Fortune magazine, where he spent 19 years. He is the author of two books: “Inside Apple” (about Apple) and “Wild Ride” (about Uber).