SPAC Man Begins

Alex Danco, 2020-07-26

Continuing on the topic of SPACs.

Alternative to Traditional IPOs

  • Also See: Why famed VC Bill Gurley thinks IPOs are such a rip-off

  • At IPO banks work for the ecosystem, not the firm.

  • Banks win regardless of the direction of the stock (incl. greenshoe option)

  • On the other hand, banks are gatekeepers protecting new shareholders from potential misrepresentations by the firm.

  • Avoiding banks is in the old shareholders’/investors’ interests, but this reward comes with a liquidity risk.

Is the Remedy (SPAC) Better than the Illness (Banks)?

  • Public company (SPAC) merges with a private firm and makes the firm public.

  • If SPAC investors are not happy – they can get their money back.

  • SPACs give certainty about the share price immediately (compared to IPO’s pricing and volumes that are determined very close to the IPO event).

  • Speed to market with SPACs is way higher than IPO (Vegas Wedding Chapel for liquidity events © Byrne Hobart).

  • Brand halo – a charismatic sponsor may pump up the valuation.

SPACs Aren’t Cheap, Either

  • SPACs will buy a firm at a discount [compared to the firm’s idea of a fair price].

  • SPAC organizer’s take is 20% (compare to Banks’ 3-5%) promotion fee (adding insult to the injury).

  • Maybe this fee when SPACs become mainstream will get lower.

  • IPO costs are disguised rather than saved.

Stockholm Syndrome at Play

  • After the agreement SPACs start working FOR and WITH the company, aligned interests.

  • No lockups, no greenshoe, total price transparency.

  • Maybe after the huge one-off charge the combined firm’s share price will be more fair, i.e. the firm+SPAC reap the benefit of the “pop”, not new investors.

  • But how much would you pay to be taken public by someone working for you? [hint: SPACs may charge way too much for the privilege]