The SPAC Trade Is Off

By: Spencer Israel

Back in early July we wrote about how the market seemed to have an endless appetite for Special Purpose Acquisition Companies (also known as SPACs or blank check companies) and the various companies with which they were merging. 

At the time, the SPAC trade looked like the trade of the summer. But just about four months later, investor sentiment in SPACs has dampened and the rally has faded. 

That Was Then…
To recap, 2020 has been a record year for SPACs. According to Renaissance Capital, 60 SPACs have listed this year, raising approximately $22.5 billion from investors. 

Sponsors of these SPACs include everybody from Bill Ackman (whose Pershing Square Tontine, (ticker: PSTHU) is the largest SPAC on record), to baseball’s Billy Bean, to former House Speaker Paul Ryan.

SPACs typically trade between $10-$11 per share prior to merger announcements, and for a brief moment in time, it looked like buying them immediately after the announcement was a no-brainer. 

Social Capital Hedosophia Holdings Corp. II (IPOB), which is merging with online real estate platform OpenDoor, was one such example. The stock popped from $10 to $27 in the four weeks after the announcement. Tortoise Acquisition Corp II was another. The stock got to over $58 in the weeks before its merger with Hyliion (HYLN) closed. Lordstown Motors (RIDE), which merged with DiamondPeak Holdings on Oct. 26, was over $31 at one point. 

Some moves were even shorter-lived. Spartan Energy Acquisition Corp (SPAQ), which is merging with EV manufacturer Fisker, popped from $10 to $21 in just two days after its announcement. Landcadia Holdings II (LCA) went from $10 to $17 in two days after announcing its merger with Golden Nugget Online. 

Other SPACs experienced huge rallies on mere rumors. Forum Merger II Corporation (FMCI) got as high as $20 on just the rumor that it would buy Impossible Foods. After the merger with Tattooed Chef was announced, the stock ended up rallying to $28 anyway. 

And of course Nikola, perhaps the poster child for the SPAC movement, infamously topped out just below $94 the week after its merger with VectoIQ Acquisition Corp closed in early June.

…This Is Now
Today, every one of the companies mentioned above is trading significantly below its highs. Some, like SPAQ, are even trading below the $10 benchmark. 

There are a number of potential reasons as to why SPACs attracted the amount of attention that they did. Perhaps companies wanting to go public anyway were attracted to the relatively less burdensome process during a pandemic. Compared to the traditional IPO process that requires dozens of meetings with investment banks and potential investors, the SPAC merger process is much simpler and less expensive. 

Perhaps the successes of DraftKings (DKNG) and Virgin Galactic (SPCE), which completed their SPAC mergers in April and last October respectively, opened the markets’ eyes up to the possibility. Shares of both companies more than quadrupled in the months after their mergers, though both are also far below their all-time highs. 

Is it fair to call this exuberance a bubble? Perhaps. SPACs were always a risky proposition rife with conflicts of interest and limited transparency, though that hardly seemed to matter three months ago. 

Now, investors in these companies who didn’t get out while the going was good (many of them likely retail) are caught long. They just learned a valuable lesson in the perils of chasing the shiny object. 

The author does not own any of the SPACs or recent IPOs mentioned in the article.

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