You Get An SPAC, You Get An SPAC, Everybody Gets An SPAC!
Also, Housing Discrimination, Energy M&A, and Tweets of the Week
Companies in need of money basically have two options: raise private capital or go public. The typical fundraising playbook for companies looks something like this: complete a few rounds of private investment from venture capital and angel investors, then (a) file to go public (b) get acquired by another company, or (c) get acquired by private equity investors.
This formula has its flaws, but it generally does a good job at helping companies grow: private ownership gives companies latitude to experiment and figure out their business. Once a company identifies its revenue model, attracts customers, and forges a path for longer-term growth, that company can raise millions (or even billions) of dollars through the public markets. If the company wants to stay private (or if there isn’t demand for a public offering), it can sell itself to a larger business, either combining with that firm or remaining a standalone unit. Or the company could sell itself to a private equity firm, which will eventually take the company public, or sell it to a competitor, or sell it to another private equity firm(s).
The whole idea here is that private and public markets are supposed be dynamic, efficient and flexible, ensuring that any company, no matter its business or financial situation, can find a way to access capital and continue growing (or at least avoid imploding).
Special purpose acquisition companies (SPACs), also known as “blank-check companies”, are an increasingly popular mechanism for private companies to go public, via merger. It sounds complicated but the general idea is pretty simple: SPACs, themselves publicly traded companies, are listed for the sole purpose of merging with an unspecified private company within a set period of time (typically two years). Once a merger is completed, the public SPAC shares convert to shares in the target company, which magically transforms into a public company. Voila!
Until SPACs merge with a company, they’re not a “business” in any traditional sense, despite being publicly listed. They’re basically just a promise from the SPAC’s CEO (typically a well-known and respected financier) to their legion of fans/investors: “Give us your money in our public offering and within two years, we’ll merge with a privately traded company and you’ll own shares in that company – or you’ll get your money back.”
Demand for SPACs is at an all-time high, with 2020 set to be a banner year:
Source: Financial Times
In the last few months, a number of high-profile SPAC deals have been completed: electric-truck maker Nikola and sports-betting operator DraftKings both went public via SPACs; health-care-services provider MultiPlan merged with an SPAC at an enterprise value of $11 billion, making it one of the largest ever such deals; hedge fund billionaire William Ackman completed a $4 billion IPO with his SPAC this week, the largest SPAC IPO to date; and now even Airbnb is reportedly considering the SPAC route over a traditional IPO or direct listing.
According to the Wall Street Journal, the pandemic is at least partially responsible for SPACs’ surging popularity: “Fallout from Covid-19 has put many businesses under stress and led backers of new SPACs to bet that they can find distressed companies to acquire.”
Fans of SPACs point to their benefits for private companies. The traditional IPO roadshow is long and cumbersome process, which involves wooing many investors and dealing with the SEC, whereas merging with an SPAC is comparatively hassle-free. Likewise, a company’s initial IPO price can swing wildly back and forth in the hours before listing as bankers gauge demand; with SPACs, a company’s valuation is agreed upon in advance.
Critics of SPACs point to their checkered history: in the ‘80s, SPACs were frequently associated with penny-stock frauds. They also allege that today’s SPACs are “overly generous to founders, lack transparency and are often riddled with hot-money investors who have no intention of becoming long-term shareholders.” Further, an SPAC’s CEO gets sole discretion over the merger target; the vehicle’s shareholders have to put their trust in one person (or a few people) to select a high-quality target at the right valuation.
Worth considering is the possibility that traditional IPOs are a pain in the butt for good reason. When a private company files to go public, it means that company is willing to open its books to show Wall Street and regulators that the company is financially sound and worthy of Joe the Plumber’s investment. In many ways, filing an S-1 is a act of radical transparency and honesty; merging with an SPAC eliminates a company’s need to be radically transparent (in its pre-IPO phase). And while an SPAC may reduce inconvenience for would-be public companies, they also create a hurdle between retail investors and private companies making their public market debuts. The fundamental point of an IPO is to enable a bunch of ordinary investors to participate in a company’s growth. SPACs don’t make that impossible – they just make it harder.
This is what systemic racism looks like:
A recent ProPublica story found that at least six investigations into housing discrimination were scuttled under the Trump administration’s Office of the Comptroller of the Currency (OCC). The banks (which included Bank of America) came under investigation for allegedly offering fewer loans to minority homebuyers, over-charging minority homeowners on their loans, and outright ignoring loan applications. Career staff at the OCC launched the inquiries, but their investigations were “brushed aside by the agency’s leadership, according to two current and two former OCC officials who have left in the last three years.”
Why it matters: Home ownership in the U.S. has created wealth for millions of Americans, lifting them into the middle and upper-middle class – but nearly all the beneficiaries have been white. Federal agencies, state governments, and municipalities conspired throughout the 20th century to methodically obstruct Black people from acquiring homes in white neighborhoods. (For a deep dive on this subject, Ta-Nehisi Coates’ timeless The Case for Reparations is a must read).
Racist policymaking still shapes the housing industry and our economy. Today, the homeownership rate for Black Americans is 44 percent, compared to 74 percent for whites. A 2019 report finds that Black borrowers are less likely to get a home loan than white borrowers with the same credit score.
ProPublica’s investigation is especially timely, considering (a) President Trump’s recent claims that Vice President Biden wants to “abolish” the suburbs (b) The Trump 2020 campaign’s Willie Horton-esque ad about home invasions (c) The Trump administration dismantling an Obama-era regulation that seeks to combat housing discrimination (Go deeper: Housing Wire) and (d) Trump’s inflammatory social media posts on this very topic:
In sum, America’s long history of racial discrimination and economic inequality is inseparable from racist housing policy. As the national conversation on race continues, discrimination in housing – particularly against Black Americans – needs to be front and center.
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Private Equity
Lawmakers debate PE’s role in recovery: Reps. Stephanie Murphy (D-Fla.) and Bryan Steil (R-Wis.) both called private equity “a driver of growth”, but described different roles for the government in regulating the firms. (Go deeper: The Hill)
Blackstone recovers in Q2: After a dismal Q1 in which the PE giant recorded a 21.6% decline, the value of Blackstone’s portfolio climbed by 12.8% this quarter (Go deeper: WSJ)
Tech-focused PE investments in high demand: Funds focused on the tech sector have seen higher fundraising and dealflow than their peers investing in other sectors (Go deeper: WSJ)
Venture Capital
VC capital runs dry for black entrepreneurs: More than a dozen black entrepreneurs describe how “deeply ingrained racism plays a role in the low levels of funding” for their startups. (Go deeper: Washington Post)
Electric carmaker Xpeng Motors scores $500 million: The Chinese company’s new funding comes amid soaring stock prices of rivals Tesla and Nasdaq-listed Nio. (Go deeper: CNBC)
Hippo raises $150 million in Series E round: The home insurance startup, now valued at over $1.5 billion, is riding the coattails of renewed interest in home ownership amid Covid-19 and fellow insuretech Lemonade’s gangbusters IPO (Go deeper: Housing Wire)
Vaccine maker CureVac raises $640 million: The biotech’s largest-ever private funding round comes as the company races to bring an mRNA COVID-19 vaccine to market. (Go deeper: Fierce Biotech)
M&A
Chevron buys Noble Energy for $5 billion: The all-stock deal is the first in the energy sector since oil’s crash in April. The deal follows Chevron’s failed attempt to buy Anadarko for $33 billion in 2019, having been beaten out by Occidental. (Go deeper: CNBC)
eBay spins off classifieds business for $9.2 billion: Norwegian classifieds firm Adevint was the buyer. The deal follows activist pressure from Elliot Management, and eBay’s sale of StubHub before the pandemic (Go deeper: Axios)
Marathon Petroleum looks to big divestiture: The gas company is accepting bids for its gas station network Speedway, which could fetch between $15 billion and $17 billion. Like eBay, Marathon is under pressure from Eliot Management (Go deeper: Reuters)
IPOs
Ant Group seeks dual Hong Kong-China listing: The Jack Ma-owned giant behind popular payments network Alipay said it will bypass New York in what may be upwards of a $200 billion listing. (Go deeper: WSJ).
John Hyatt, author of What’s the Deal, is a financial blogger and writer. Follow him on Twitter, connect with him on LinkedIn, or email him your feedback at johngilberthyatt@gmail.com.