Skip to main content

March 31st, 2021

Yakety Yak, Don’t Talk SPAC

Yakety yak, don’t talk SPAC. In the strange world in which we operate, many of us now know more people involved with a SPAC than people that have had Covid. The SPAC has become the latest fad, marketed as an easier way to do an IPO. As a clear sign of their popularity and an indication investors do not know who the sucker is, celebrities abound. SPACs have been established involving famous Graham- Dodd acolytes such as Shaq, ARod, Ciara, Paul Ryan, and Elvis. Setting aside the investment acumen of the sponsors, the basic economic contract with investors is startling. At its core, a SPAC raises a mound of cash, say $500 MM, and is given two years to acquire a company. If they buy a company in that time frame, 20% of the common stock is given to the sponsors for a minimal capital contribution even if the value of the acquired company never increases. To put a sharper point on this, it means investors hand $100 MM of value from a $500 MM purchase to the promoter, irrespective of performance. By contrast, in private equity, the promoter has to return all capital, all fees paid and 8% asset growth per year to get paid a dollar. In the eighties, tax shelters involving buying racquetball courts and cattle herds made money for promoters, although rarely for investors. SPACs have the same potential. In order to sell sizzle, many SPACs are hunting for zero revenue companies where the future is all dreams and immeasurable. We asked a banker about selling one of our portfolio companies to a SPAC and were told, “Can’t be done, you have real numbers.” The SEC might find this to be a fertile hunting ground.

A closer look at 2021: A SPAC Odyssey reveals that 18 of the SPACS have plans to merge with EV or EV related companies. 8 of those companies have no revenue. One of them, Nikola, has a multi-billion dollar market capitalization despite admitting a promotional video of their truck cruising was simply a truck rolling downhill with no power. Rapper Cuvee has released, SPAC Dream, a rap song. Next, we can expect SPAC ETFs and funds of SPACs. A cabinet level position as SPAC Master General will soon be named.

I’m Rob Morris and I approved this blog.

Back to Rob's Blog