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A blog by Leon Oudejans

Are SPACs a scam?

My blog’s title is based on this thought: why would any prime business use a Special-Purpose Acquisition Company (or: SPAC) for an Initial Public Offering (or: IPO)? That thought occurred to me when I read that the failed WeWork IPO agreed to a $ 9 billion transaction with a SPAC for making its overdue stock exchange debut. Are SPACs destined for subprime assets?

An Initial Public Offering (IPO) requires a road show to shore up interest in the shares of that company. An IPO is dubbed successful if the market share price exceeds its IPO price. Recently, the Deliveroo IPO failed badly: the market price closed at 26% below its IPO price (AFR).

In and of itself, an IPO for a SPAC does not make any logical sense. Why bring an empty company to a stock exchange? There are two main reasons why this happens anyway: profit and liquidity. Hence, you could argue there’s only one reason, being money.

The liquidity argument needs some elaboration. Monetary expansion, monetary (interest) policy, and/or quantitative easing have caused an abundance of liquidity, which must find a way into the system. SPACs facilitate using that abundant money. There’s one problem. Prime assets are too expensive for SPACs. Hence, failed IPO’s and/or shelved assets come into the picture.

In many countries, the savings of retail investors are high due to the pandemic, and returns on savings are low due to Central Bank monetary (interest) policy. Hence, retail investors are looking for ways to invest their savings, based on the same two arguments: profit and liquidity.

In general, professional investors are also called smart money while retail (or: individual) investors are called dumb money (Investopedia). In SPACs, smart and dumb money meet each other: professionals are exiting and retail investors are replacing them, expecting a quick profit.

In general, a SPAC sale & purchase transaction is not at arm’s length. It’s a deal amongst professional investors. Hence, the transaction price does not necessarily imply a fair market value. This is not an issue because dumb money will replace smart money anyway.

Only some vague sources call SPACs a scam. Articles in Harvard Business Review and Morningstar advise caution with SPACs. Seeking Alpha warns: “SPACs on average have shown very poor shareholder returns”. Reuters recently reported that the SEC is looking into SPACs. As Sgt Phil Esterhaus in Hill Street Blues used to say: “Be careful out there”.

All ‘Bout the Money (1998) by Meja
artist, lyricsvideo, Wiki-1, Wiki-2

It’s all ’bout the money 
It’s all ’bout the dum dum da da dum dum

Note: all markings (bolditalic, underlining) by LO unless stated otherwise.


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