By: Spencer Israel
Against all odds, the hottest trade of the summer of 2020 has very little to do with the coronavirus.
It’s not a bet on which pharmaceutical will develop the first COVID-19 vaccine. It’s not a play on the comeback of restaurants and travel stocks. It’s not even going long bankrupt companies (though that was briefly a contender). No, the hottest trade of the summer is the Special Purpose Acquisition Company.
The Special Purpose Acquisition Company (also known as a SPAC or blank check company) is a company whose entire purpose is to raise money via an IPO, then use those proceeds to acquire a privately held company within 2-3 years and assume the identity of that company. These transactions are sometimes called a “reverse takeover,” with the private company essentially using the SPAC as a proxy to go public.
SPACs are notoriously speculative, and their stocks are liable to be manipulated by rumors. As one Reddit user explained, SPACs are Wall Street’s version of a mystery box (it could be anything!). But a number of high-profile reverse takeovers in recent months have brought SPACs from their quiet corner of Wall Street to front and center.
SPACs Have Been Growing In Popularity For Years
There were 59 SPAC IPOs in 2019 according to SPACInsider, the highest since 2007. Halfway through 2020 we are on pace to shatter the record for both number of SPAC IPOs and deal size. And this year has already set a new all-time high for average deal size at over $314 million.
Amazingly, SPAC IPOs outnumbered traditional IPOs in March, April, and May in both deal count and total deal value according to Bloomberg Law, though part of that was the virtual evaporation of the IPO market during those months. Still, the trend has undeniably gained steam in recent months. Just look at the increase in search activity for the term “Special-purpose acquisition company” on Google over the last two months.
Source: Google Trends
The Recent Headliners
On June 29, it was announced that Golden Nugget Online Gaming would go public via reverse takeover with Landcadia Holdings (LCA). The transaction will make the new company just the second publicly traded online casino company in the U.S. according to the release, and will trade under the ticker GNOG. Shares of LCA traded higher by as much as 45% on the headline.
GNOG is just the most recent example of a private in an emerging industry using a SPAC to go public. In early June, Tesla-competitor Nikola (NKLA) went public via a merger with VectoIQ (VTIQ). In April, sports-betting company DraftKings (DKNG) went public via a merger with Diamond Eagle Acquisition Corp (DEAC). And last October, Richard Branson’s Virgin Galactic (SPCE) went public by merging with Social Capital Hedosophia (IPOC). Even Bill Ackman is seeking to get in on the SPACtion.
Beware Of SPACulation
The fee-laden traditional IPO process has predictably collapsed with the economy. Suddenly, SPACs seem like a viable low-cost alternative for companies seeking to go public. This has become especially true for the cash-strapped cannabis industry. Each of the new companies above has seen its stock spike after the merger completed, which has only added to the allure.
But SPACs are notoriously speculative investments. When you buy into a SPAC, you’re essentially buying into the idea that the SPAC’s managers will find the right company to buy. There’s, of course, no guarantee that the company being acquired will be successful, and even if a worthwhile target is found, the deals don’t always go through.
What is more certain, however, is that this trade is gaining more attention. Expect to see more SPAC headlines this summer. Whether or not those headlines actually translate to alpha-generating deals is an entirely separate issue.
The author does not own any of the SPACs or recent IPOs mentioned in the article.
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