- It’s a heyday for SPACs, offering start-ups a way to become public without the IPO targeting role.
- Retail investors see SPACs as an opportunity to get in early on the next Apple or Google.
- The big winners are CEOs and celebrities who usually get a payday to give their names to SPACs.
- Visit the Insider Business Department for more stories.
A debate rages in Wall Street and Main Street over SPACs, the financial engineering of the moment. Depending on who you ask, these so-called blank check businesses – funds raised for the sole purpose of buying and publishing a company – are the latest scheme for financial charlatans, or the biggest innovation in capital markets. in years.
Let’s sit right down from the drama: exaggerate both positions. That being said, exactly who surely makes money here – hint: not the troubled masses – is the best narrative. SPACs, short for special purpose procurement companies, are a hiding place for bankers, lawyers, capital-hungry entrepreneurs, and, critically, the privileged who are already very well connected and can benefit by simply lending their name to a project.
At the same time, SPACs are not new or particularly innovative. They have been around for years, although they have mostly been sent to a dark corner of the financial industry. It is still worthwhile to understand why they are suddenly furious – and who will be hurt if the anger inevitably dies.
Organizers of a SPAC are asking investors to give them money to set up a listed company. These sponsors, who usually invest a modest amount while allocating themselves 20% of the shell, then hunt for a private target company that would like to go public. This is an opportunity for investors to get a high return in an era of ultra-low interest rates. And for the target companies, especially those who have otherwise struggled to go public, this is a quick way to an initial public offering. Virgin Galactic, DraftKings, and more recently, genetics firm 23andMe and the dog-walking app Rover, have all agreed to be bought by a SPAC.
In short, a SPAC is like a pop-up private equity firm, but without the diversified portfolio. The SPAC makes exactly one investment and then goes away, a process known as ‘de-SPACing’. The risk is that as more and more SPAC transactions increase, everyone will have fewer businesses to choose from. Last year, 248 SPACs raised $ 83 billion, according to SPAC Research, a smart Chicago firm that is soaring as a sort of Bloomberg terminal for the SPAC world. Already this year, there were another 134 SPAC transactions that raised $ 42 billion. Before last year, there had been less than 200 transactions together in the past seven years.
Software entrepreneur Aaron Levie joked on Twitter that day: “Little known fact: we achieve simplicity once more SPACs exist than real companies.” A healthy development is at play here. In an era that ended with the eruption of the dot-com bubble in 2000, companies in much earlier stages of their development have become known as since. Apple, Microsoft, Amazon and others have given small investors the opportunity to come in relatively early.
SPACs, even if they are flawed, give investors the chance today. Think of an agreement this week in which Alta Crest, a SPAC overseen by veteran investment banker Ken Moelis, injected $ 1.1 billion into a manufacturer of flying taxis in Palo Alto, California, called Archer Aviation. United Airlines, which also invests, has announced a $ 1 billion order for Archer’s aircraft, with a view to a short-haul taxi service between airports. The downside: Archer does not plan to start delivering its long-range aircraft until 2024, which is also the first year it has earned revenue. It’s as early – and speculative – as it gets.
And that’s the rub. Investors in SPACs are taking flight. (Literally, in the case of Archer.) About who just goes along, consider the growing number of established executives and other prominent people who sit on the boards or give advice. This group earns hundreds of thousands of dollars without doing so much work.
For example, a SPAC called Forest Road Acquisition associated with former Disney greats Kevin Mayer and Thomas Skaggs buys the reputable fitness company Beachbody. His advisers also include hoop star Shaquille O’Neal and human rights lawyer Martin Luther King III. Stanford Professor Fei-Fei Li and Kristina Salen, CFO of World Wrestling Entertainment, are on the team advising the SPAC started by entrepreneurs Reid Hoffman and Mark Pincus. And Vy Global, the SPAC offshoot of a venture capital firm, sees Facebook executives Hugo Barra and Javier Olivan, as well as Reddit CEO Steve Huffman, as directors. (Another Vy fund recently invested in Reddit, prompting some Reddit board members to ask Wall Street Bets if Vy’s SPAC would buy the entire company.)
It is not as if these people add any value. Surely only their networks are useful for raising money. Some also invest with the founders of SPAC. But everyone has full-time jobs, making it the latest ‘side-chase’ for the wealthy.
It’s more or less obvious how this is all going to end. Good deals will lead to bad deals. The volume will dry up as soon as the interest rate rises. A few companies will continue with greatness, while many more will evaporate as the bubble bursts.
And the financial engineers and those who serve them will move on to the next new thing.
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The Wall Street Journal reported on Wednesday that the buyout of TikTok by Oracle, Walmart and others has been suspended indefinitely. In my first Insider column, on November 13, I noticed 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 a bad policy from the start, as it was a fickle dictation from a deal president who wanted to seek ‘key money’ for his problems. I said at the time, the deal would probably wither in a Biden administration. I’m told that Google, not Oracle, remains TikTok’s cloud provider.
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Is it just me, or has Twitter become immeasurably more pleasant since he removed the 45th President of the United States? I find my feed interesting, informative, entertaining and downright civil these days. You?
Adam Lashinsky is a Business Insider contributor and former executive editor at Fortune magazine, where he spent 19 years. He is the author of two books: “Inside Apple” (about Apple) and “Wild Ride” (about Uber).