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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’
It’s always startling to discover a new generation of investors that is both willing and eager to fall for another stock market mania. The mind-blowing, collective amnesia that has been the Spac bubble provides another example of the risks of an investment proposition seen to offer easy wealth, however illusory.
The bubble was, and remains, sadly, really quite something. In simple terms, the way the ruse works is that a few clever men — yes, mostly men — get together and “sponsor” a new shell company. Known as a Special Purpose Acquisition Company, this comprises nothing more than a pledged aspiration to use the money raised from other people in a profitable way. They conduct an initial public offering, and then find a private company to merge with and take that company public through the merger. Got it?
The Spac sponsors are on the hook for the legal, accounting and underwriting fees, which can run into many millions of dollars depending on how much money the investment vehicle raises from other people. In return for setting up the Spac, and raising the capital for it, the sponsors get essentially free equity, which they hope will be quite valuable. Their fees are covered, assuming a merger of some sort eventually happens.
Once the Spac is formed, the sponsors have two years to find a merger partner and consummate a deal. If the sponsors fail, they absorb the fees themselves and return the money raised to investors, plus interest. No surprise that the incentive for Spac sponsors is skewed towards getting the IPO done and then finding a merger partner, of nearly any stripe, before the two-year window closes.
The ruse works in large part because it’s a confidence game. “It’s called a confidence game,” the actor Joe Mantegna explains in the 1987 David Mamet film, House of Games. “Why? Because you give me your confidence? No. Because I give you mine.”
Who wouldn’t want to invest alongside seemingly smart — and rich — businessmen and celebrities such as Richard Branson, Bill Ackman, Masayoshi Son, Chamath Palihapitiya, Michael Klein, Jay Z, Shaquille O’Neal and Alex Rodriguez, all of whom have either sponsored Spacs or lent their names to them? It’s the timeless art of seduction writ large and catapulted into the public equity markets.
Spacs are not new. According to Spac Insider, an industry tracker, the first Spac appeared in 2009, in the wake of the financial crisis, when it raised a meagre $36mn in an IPO. But the Spac phenomenon exploded around the turn of the decade. In 2020, there were nearly 250 Spac IPOs, according to Spac Insider, that raised some $83bn from investors. The following year, 613 Spacs got done, raising a whopping $162bn.
At times, the mere mention of a potential merger between a Spac and a seemingly exciting private company would send investors wild and stocks soaring. For instance, look at what happened when the Anglophile investment banker Michael Klein announced in February 2021 that his Churchill Capital IV Corp, one of the many Spacs launched by him, was going to acquire the privately held Lucid Motors, the electric car manufacturer. The Spac’s stock soared about 500 per cent. The value of Klein’s, and his fellow sponsors’, $43mn investment in the Spac was suddenly worth some $3.3bn on paper, according to Reuters.
The implied value of Lucid was $56bn. The closing of the deal was still five months away. These days Lucid is valued at $10bn and the stock is down 92 per cent from its peak.
Elsewhere the Spac landscape is littered with casualties and stocks trading at fractions of IPO levels. Law firm Skadden, Arps, Slate, Meagher & Flom estimated in April some 12 companies that merged with a Spac have sought Chapter 11 bankruptcy proceeds. The Wall Street Journal estimated at the time there were 100 running out of cash.
Probably the most infamous Spac was the one done to try to salvage WeWork, which recently filed for bankruptcy, further embarrassing Masayoshi Son, founder of the company’s financial backer SoftBank.
And yet, investors are still falling for their alleged charms. So far this year, there have been 28 Spac IPOs that have raised $3.6bn, according to Spac Insider — a far cry from the heyday but not nothing. The collective delusion on Spacs is enough to put me in the mind of the 1895 Rudyard Kipling poem, If: “If you can keep your head when all about you are losing theirs and blaming it on you . . .” then “. . . you will be a man, my son!”