Lordstown Motors is the latest high-profile company that plans to go public by merging with a special purpose acquisition company or SPAC. These types of so-called blank check or reverse merger deals used to be an object of scorn on Wall Street. Now they’re all the rage.
Among the companies that have recently hit Wall Street by merging with a SPAC are Richard Branson’s Virgin Galactic (SPCE), sports gambling company DraftKings and Lordstown electric truck rival Nikola.
Investing guru Bill Ackman recently launched a SPAC named Pershing Square Tontine Holdings that went public with the hopes of buying a unicorn startup.
Even Billy Beane, the baseball statistical savant played by Brad Pitt in “Moneyball,” now has a company named RedBird Acquisition that’s looking to go public as a SPAC in order to buy a sports franchise.
So why are so many SPACs rushing to go public?
Plenty of private companies would rather merge with a blank check firm than go through the time-consuming and expensive process of raising money through a more traditional initial public offering. That’s especially the case during the coronavirus pandemic.
Blank check deals are faster way to go public
“The advantages that SPACs have are even more compelling because of Covid-19,” said Bob Blee, head of corporate finance at Silicon Valley Bank. “There’s less uncertainty and a faster time to close deals.”
The fact that blue-chip companies backed by the likes of Branson and Ackman are embracing SPACs has also helped erase some of the stigma. There was a time when investors viewed SPAC deals with derision. The belief was that if you needed to go public through a reverse merger with an already existing shell company, then you probably weren’t healthy enough to do a more traditional IPO.
“The gene pool for SPACs has gone up because there are stronger companies doing these deals. There is a better track record and history and more credible, high-value targets,” said Bill Haddad, a partner in the corporate practice of law firm Venable LLP who has worked on SPAC deals.
Haddad added that the success of Virgin Galactic, DraftKings and other high-profile SPACs is also helping to convince more companies to go public via this route. That means the parade of SPACs probably won’t end any time soon.
But investors need to be careful.
“The success of SPACs is a sign of excessive prices,” said Todd Lowenstein, managing director and equity strategy executive of The Private Bank At Union Bank.
“Companies are being opportunistic and using their stock as currency to buy up other firms,” Lowenstein added. “SPACs are a fast-track IPO, and there is an insatiable appetite for new stocks. But all of this points to a frothy market.”
IPOs still make more sense for some private firms
It’s also not clear if the hot SPACs of today will continue to be Wall Street darlings in the future. The track record for many recent blank check stocks is spotty at best.
Investment banking giant Goldman Sachs said in a report this week that the 56 SPACs it looked at since January 2018 outperformed the S&P 500 by 11 percentage points in the first three months after an acquisition but lagged the broader market in the 12 months after the deal.
And a recent study by IPO research and investing firm Renaissance Capital found that 89 SPACs that had gone public since 2015 have posted an average loss of 18.5%, compared to an average gain of 37.2% for traditional IPOs.
Silicon Valley Bank’s Blee told CNN Business that the risks associated with SPACs will probably keep most major unicorns from going public via a blank check deal.
There’s also the issue of time sensitivity. Once a SPAC goes public, it typically has 24 months before it has to buy something or it must dissolve. Some private companies may want to stay private for longer and not get rushed into a deal.
In addition, companies looking to go public with a SPAC also tend to need to get significant backing from larger investors through a so-called private investment in public equity deal, or PIPE. These deals often come at a discount.
“This can be an issue from a liquidity standpoint,” Blee said, adding that big major unicorns can gain more notoriety by going public with the backing from big Wall Street investment banks that pitch the company to major money managers.
In other words, don’t expect the likes of Airbnb, trading app Robinhood or payments processing company Stripe to go public with a SPAC.
“There probably isn’t a place for SPACs with the top unicorns,” Blee said. “They can gain more notoriety and capture more investor attention by going public through traditional means.”
That’s exactly what BigCommerce, an e-commerce marketplace that competes with Shopify (SHOP), wanted for its IPO.
BigCommerce, which runs online stores for Ben & Jerry’s, Sony and headphones maker Skullcandy, debuted on Wall Street Wednesday and the stock soared more than 200%. It rose another 30% Thursday.
“The IPO, for us, was a fundraising round and we wanted to build our brand,” said BigCommerce chief financial officer Robert Alvarez in an interview with CNN Business Wednesday.
“We’re competing with other large public companies and an IPO gives our merchants and other partners more assurance that we’ll be around for awhile,” Alvarez added. “We wanted to pick long-term investors with conviction to help us raise money to fuel growth.”