The Inevitable SPAC Trend Outcome
Thursday, February 11th (64 Second Read)
S&P 500 Rises For First Time in 3 Sessions
Dow: -0.02% | Nasdaq: +0.38% | S&P: +0.17%
Catch Up Quick
Backed by Amazon ($AMZN) and Ford ($F), electric vehicle startup Rivian Automotive is looking to IPO as soon as Q3 2021 at a valuation >$50B
Dating app Bumble raised $2.2B in its IPO, selling 50M shares at $43 each → initial pricing range was $37 to $39
Recent economic estimates posit that the U.S. economy could take a $14T – $28T blow in the long run due to coronavirus linked education learning loss
House Speaker Nancy Pelosi expects new coronavirus relief to be signed into law before unemployment programs expire
Impeachment managers will focus on Trump's role on day of Capitol attack
The U.S. budget gap was 5x higher in January 2021 than it was a year ago
Nearly a 1M American mothers have left the workforce during the pandemic
Walmart and Oracle’s bid to buy TikTok’s U.S. operations is on hold indefinitely (Wall Street Journal)
Notorious CNBC market commentator Jim Cramer stated the stock market is on a “highway to the danger zone”
Prosecutors in Georgia launched an investigation into Trump’s efforts to overturn the state's 2020 election results
The NBA will require all teams to play the national anthem after Mavericks owner Mark Cuban said he would stop playing it
Federal authorities are investigating counterfeit N95 masks that have been sold to hospitals, government agencies, and medical facilities in ~5 states
Thought of the Day
Former NFL quarterback Colin Kaepernick on Tuesday disclosed that he has formed a blank-check company seeking to raise $250M in an IPO — Dan Primack, Writer at Axios
To any financial market follower, it is no secret that, with respect to institutional and accredited investors, everyone and their uncle is raising money for a SPAC entity via an IPO process
While we have written about SPACs on multiple occasions, in short, this process typically refers to firms and investors creating a shell company, taking it public (IPO), and using the proceeds to combine with a private company (which is typically referred to as a de-SPAC), thus giving public company status to the target
"SPACs are fulfilling a unique role in M&A and capital markets today. In these markets, SPACs represent a compelling alternative to a traditional IPO or to a private sale” — Morgan Stanley, M&A in 2021: An Accelerating Rebound?
CNBC also put fourth an informative SPAC primer a few months ago:
In 2020, 248 new SPACs raised $82B in the U.S. — more than 5x 2019’s total volume
Due to the immense % of public market volatility coming from SPAC activity, implications aside, many investors and speculators are attempting to predict if this will be a sustainable trend or just a fad
To expand on the mechanical SPAC summary above, the SPAC, after raising money from public markets, typically has only 18 - 24 months to actually acquire a company and fulfill the use of proceeds (buying out a private company)
Therefore, it is inevitable that the huge number of SPACs will put colossal pressure on the dwindling number of viable targets
As of early February 2021, approximately 300 SPACs remain in search of acquisition targets — Morgan Stanley, M&A in 2021: An Accelerating Rebound?
The Bottom Lines
When a SPAC makes an investment, given it is usually a 100% stake in the target (unlike most private / public investments) it is even more important to find a solid target given the implied idiosyncratic risk
Therefore, many SPACs will struggle more and more to find credible targets given the aforementioned point in bold
Furthermore, regarding the question of SPAC sustainability in this context, due to the increasingly high likelihood that many won’t be able to find a target to acquire in the 18 - 24 month window, SPACs will likely lose steam as this narrative plays out, in turn, allowing the amount of targets to replenish, in which another rise in SPAC activity will follow subsequently
Financial markets are inherently cyclical!
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