The biggest stock market story of 2020 should be that the entire entity is completely untethered from the life of the average American. People are hurting as a direct result of COVID-19 and from the pandemic fallout, but despite an initial drop off the cliff, the stock market is back on the up and up. But everyone knows the stock market isn’t the economy, even in less volatile times, which makes room for another storyline: the rise of the SPAC.
If you’re intimately involved in your investments, you’ve already heard about the almighty SPAC (pronounced “spack,” despite being an acronym for “special purpose acquisition company”). If you let someone else take care of that, you’ve still at least heard about them, even if you haven’t been aware. They’re also called blank-check companies, and they’ve turned private outfits like Virgin Galactic, DraftKings and multiple electric vehicle startups into stock-market stars — at least for a little while.
Yes, we’re delving into the stock market, which can steer into jargon territory fast, but a few factors make SPACs worth a gander for even the most financially illiterate, and they include former House Speaker Paul Ryan, Playboy magazine and a pile of money that has topped $50 billion.
Don’t worry, we’ll tie it all together.
What are special purpose acquisition companies, or SPACs?
In the most basic sense, a SPAC is an alternative to the well-known IPO, or initial public offering. An IPO helps bring a private company public and into the stock market, but it takes a long time and a lot of support. On the other hand, a SPAC does its own IPO with the express purpose of acquiring a business in the future.
They’re called “blank-check companies” because when they start, they essentially do nothing — people invest in them with the hope that the SPAC will become the launching pad for a profitable company, and they will then be in on the ground floor. But there’s a time limit: if the SPAC doesn’t take over another business in two years, then it can call it quits and return the money to investors.
What companies use SPACs?
One of the most prominent transactions was between Virgin Galactic, Richard Brandon’s space-tourism company, and a SPAC formed by former Facebook exec and Social Capital founder Chamath Palihapitiya. He raised $600 million for the SPAC Social Capital Hedosophia when he took it public in 2017, which he did “because he [believed] the IPO process is broken,” as TechCrunch wrote at the time. A year ago, in October 2019, Hedosophia merged with Virgin Galactic, taking a 49% stake and making it the first publicly traded space-tourism company.
After that, things took off (pun intended). So far in 2020, SPACs have already raised more than $50 billion, which is more than three times what they raised in 2019, and more than they’ve earned in any previous year going back to the birth of the modern blank-check company in 2003.
For a while it looked like SPACs would be a niche enterprise. In part thanks to Tesla’s stock-market boom, electric-vehicle startups from Lordstown to Nikola started flocking to SPACs because, well, they weren’t really making money or products and couldn’t do a traditional IPO. But then things started to get weird.
In August, former U.S. House Speaker Paul Ryan announced his own SPAC, Executive Network Partnering Corp, which raised $360 million during a September IPO. Then in October, Playboy decided to go public — again. Hugh Hefner actually brought the magazine and its various bunny-clad entities to the stock market all the way back in 1971, but famously made the company private again in 2011 after years of declining valuation. It’s no secret that the brand is in murky waters in 2020, thanks in part to the end of the print magazine, but that hasn’t stopped Mountain Crest Acquisition Corp. from valuing them at $415 million. (Look out for that merger soon.)
But after the Playboy announcement, it seemed like the sky was the limit for SPACs; and now with Hims — you know, that hair loss company — recently saying it’s going this route, that seems to be true.
Where do SPACs go from here? Should you buy into them?
SPACs are kind of like Tesla. They’re the hot thing right now, but they also divide opinion: longtime investors aren’t quite sold on them, cocksure investors are betting big (and sometimes cashing in) on them, and laymen are left wondering if it’s all more of a gamble than it’s worth.
One of the biggest cautionary tales from the SPAC boom is Nikola, the electric-vehicle startup that went public with blank-check company VectoIQ, skyrocketed to a market capitalization that surpassed Ford (despite Ford selling millions of vehicles a year and Nikola selling none), scored investment from General Motors, then crashed after a report came out accusing them of misleading people about their technology, inviting investigations from the SEC and DOJ, and the departure of Nikola founder Trevor Milton.
In other words, the substance required by a traditional IPO might not be such a bad idea after all.
The best advice may just come from Barry Ritholtz, founder of Ritholtz Wealth Management, who recently told Bloomberg TV, “There is no reason to rush out and try the latest and greatest anything … when we look at SPACs, they’ve been around for just about 20 years. So it’s a product that has proven itself. The problem is that people seem to forget a handful of these products have done well and most of them, at least according to the most recent research, most of them are money losers.”
With financial uncertainty ahead in the 2020 election, it might be best to read up on SPACs now and, come 2021, dive in if the new year isn’t uncertain enough for you.
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