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SPACs: No Small Potatoes, and Still Growing Like an Idaho Spud

It is nearly impossible these days to avoid SPACs, which most of you know by now stands for Special Purpose Acquisition Companies.

According to SPAC Insider, there were 226 SPAC IPOs from 2009 through 2019, compared with 248 in 2020 alone. No small potatoes as a financing vehicle, SPACs this year will experience yet another spurt of explosive growth.

Mark Y. Liu, partner at Akerman LLP, who hosted a recent webinar on the topic, said those 248 SPACs raised $83 billion last year. Amazingly, 550 SPACS were in registration as of March 31, 2021, looking to raise $162 billion more. And SPAC Analytics reveals that SPACs made up 55 percent of all IPOs in 2020 and 76 percent of those thus far in 2021.

Sometimes known as “blank check” companies, SPACs are typically publicly owned shell companies with no operations, but with mandates to acquire private operating companies, usually in a specifically stated sector. If the SPAC does not complete a transaction within 18-24 months, it is liquidated, and funds are returned to the company’s investors. 

Trend or a fad? 

SPACs are growing like Idaho spuds and loved by investors.

While the numbers appear to say “trend,” Business Insider recently noted that investor appetite for SPACs is declining. Additionally, SPACs have come under scrutiny by the SEC over reporting, accounting and governance practices.

On the other hand, and supporting the trend side of the equation, Goldman Sachs estimates that that SPACs could drive $900 billion in M&A enterprise value in the next two years, with nearly $129 billion of SPAC capital currently searching for acquisition targets.

James Keckler, from D.A. Davidson’s investment banking group, and on the webinar with Liu, noted a few things to watch for on the horizon. He believes SPACs and their acquisition targets will get even bigger; that celebrities will continue to increase their involvement with SPACs; and that there could be multiple companies involved in a SPAC merger, versus the typical one-to-one model currently being utilized. Does that mean conglomerate?

The real question:

Are SPACs good for sponsors, the acquired companies and investors? The answer according to Liu, and others, is a resounding “yes” for all three. 

For SPAC sponsors, the benefits include access to capital markets, founder warrants and common stock incentives, and the ability to use both cash and stock for acquisitions. For potential acquisition targets (this one comes from Covington Capital Management), the ability to skip the tedious process of filing a registration statement and bypass a roadshow is attractive. And for investors, the positives include redemption rights, $10 per unit liquidation value and liquidity. 

On the downside, and not that much different from any company going through the IPO process, are the costs of going public, the reporting requirements, market oversaturation, and as some industry watchers have noted, SEC scrutiny (although this could be a good thing for investors).

Whether one is a SPAC investor, merging a company into a SPAC, or forming one, below are a few sound principles to practice:

  • First, a public company is a public company. No matter the capital structure, management team or industry, all rules and regulations governing exchange-traded securities must be closely followed.
  • Next, it is vitally important that communications are complete and transparent, both requisites to build credibility and a loyal investor following.
  • Third, fourth and fifth, research the management teams and their backgrounds; understand what the investment opportunity is really about; and ensure that the language in all documents is easy to understand, with jargon kept to a minimum.

Lastly, although there are many more “secrets” that we readily share with our clients, please know that SPAC formation, merging, and investing are not necessarily quick ways to riches. Old fashioned performance, and maybe even going public through the tried-and-true method established by the SEC in 1933, usually will win out in the long-term. But for right now, SPACs are growing like Idaho spuds and loved by investors.

Laurie Berman, lberman@pondel.com

Roger Pondel, rpondel@pondel.com

The Danger of High Flying Startups

WeWork, once a darling of Wall Street, even before its planned IPO, has been in the news a lot…and not because its stock price is flying high after going public.

In fact, as those in the investment community well know, WeWork recently pulled its IPO amidst investor doubts about the company’s valuation and concerns about corporate governance, according to the Wall Street Journal.

A follow-up WSJ story covered the incredible downfall of the company and its CEO, who has since been relieved of his duties, removing him from the company he started in 2010. According to an editorial in The Washington Post, “This might be the most spectacular implosion of a business in U.S. history. Other failures were bigger, in mere dollars. But WeWork has to be the most literally incredible. Profanity seems somehow inadequate. It’s just . . . holy wow.”

This spectacular implosion points to WeWork’s former CEO, Adam Neumann, whom The Atlantic called the “Most Talented Grifter of Our Time.” That’s saying a lot, given the downfall of Theranos due to its founder, Elizabeth Holmes, and the billions stolen by Bernie Madoff, pyramid schemer extraordinaire.

Looking at some of Neumann’s actions, it seems like the writing was on the wall.

For example, during a courting process by Nasdaq and the New York Stock Exchange, Neumann was said to have asked if the exchanges would ban meat or single-use plastic products in their cafeterias. A noble thought for sure, but one has to wonder what kind of power Neumann thought he could wield. While working on the company’s S-1 in preparation for the IPO, Neumann’s wife, also WeWork’s chief brand officer, insisted it be printed on recycled paper, but rejected early printings as not being up to snuff. This set the process back by days, because the original printer refused to work with them anymore. Earlier in his history, Neumann is reported to have claimed that he wanted to become “leader of the world, amassing more than $1 trillion in wealth.” While a successful CEO needs to have a healthy ego, these vignettes point to someone whose ego passed healthy, all the way to downright irrational.

SoftBank Group eventually bailed WeWork out through a $10 billion+ takeover, which, according to Reuters, gave Neumann a $1.7 billion payoff. That’s a lot more than the company’s currently estimated $8 billion valuation, but not even close to the $47 billion valuation it supposedly held in January.

Can the WeWork story provide insight for future start-ups and for venture capitalists who fund them?

For one, the financials, operations and inner workings of a company matter. When a high-profile unicorn, with a tremendous pre-IPO valuation files an S-1, the details become public and scrutinized by a lot of very smart investors. If a company is not on solid ground, with a strategic plan that can be effectively implemented, it’s probably not ready to go public. Additionally, when a CEO of a high-profile unicorn, with a tremendous pre-IPO valuation has delusions of grandeur, it’s probably not a great idea to back him or her, unless they have proven their worth.

While there’s no cookie cutter mold for determining which companies and CEOs will ultimately be successful, quality should be the rule, among many other warning signs that should be heeded.

Laurie Berman, lberman@pondel.com

Does it Pay to Go Public?

IPORecently, a client pointed me in the direction of a very interesting Inc. article about the case for staying private. The author is the CEO of a privately held, family-controlled tech business, one that has name cache. He notes that being a public company is expensive and time consuming. He also believes that “the most critical benefit of staying private is the facilitation of a true focus on long-term goals.”

It’s not hard to argue that Wall Street is increasingly focused on short-term results, but does that mean that management teams need to adopt the same mindset? Maybe it’s a naïve belief, but some would say that if the stock market is working as it should, a company’s share price will reflect the company’s true value over the long-term.

The New York Stock Exchange predicts a busy year for IPOs in 2014, with about 150 to 200 new issues expected. Reuters points to first quarter IPO activity of $47.2 billion, a nearly doubling from this time last year and “the strongest annual start for global IPOs since 2010.”

Clearly, there are CEOs who still believe in taking their companies public, many in the technology sector. Perhaps they are in it for a large personal pay day, but perhaps they realize that it could be easier and less expensive to raise capital to realize their growth plans. Or perhaps, their Fortune 500 client base requires audited financials as a condition for doing business together.

The decision to go public is not an easy one, and it’s a decision that every company must weigh very carefully. If you’re contemplating an IPO to become like Hooli, the fictional tech company featured in the new HBO series “Silicon Valley,” it may not be the right move. But if you’re doing it to build something that can have a lasting impact, it might just be. Just make sure you surround yourself with good advisors to ensure a smooth process.

— Laurie Berman, lberman@pondel.com

Resisting Temptation to “Like This”

No hoods

No Hoodies (source)

As I mulled this post while prying my seven-year-old out of bed this morning, I also wrestled with all of the brouhaha surrounding the pending Facebook IPO.  Something just did not sit right.  Then it hit me.  I have seen this show before.
 
Facebook’s global adulation is understandable, and well earned.  One in eight people on the
planet use it.  That’s an unfathomable audience that is now interconnected. But as the reports during the IPO process reach their crescendo, two large questions loom:  1) Does Facebook’s advertising really work; and 2) Should the company be valued at $100 billion?
 
Don’t get me wrong, I want to see the company succeed, badly.  I am dying for some good news.  But the more our collective anticipation builds, the more I worry.  Is there a clear rationale for this target valuation or is it hubris?  Are we more enamored of simply breaking an IPO record, or are investors using sane judgment?  And should California really be thinking it can potentially narrow its budget deficit with increased taxes from the many new resident millionaires that will materialize from this transaction?  I get the feeling we are putting too much value on this event, and we might be in for some disappointment.
 
As my son and I had our breakfast, an opinion piece in today’s Wall Street Journal titled “Jenkins:
The Zuckerberg Challenge
” sustained my anxiety.  The author too postulated that apart from enviable 2011 ad sale revenues totaling $3.2 billion, a chasm exists between this and Facebook’s estimated target valuation.  He also provides heaps of praise for the seemingly endless possibilities that lay before the company, which I can’t deny.
 
But as a newly public company, Facebook’s iconic leader Mark Zuckerberg will need to be more transparent with the company’s operations and growth strategies than ever before.  Demonstrating that its ad engine provides real value to its customers and a putting a keen focus on generating profits will be paramount. He now has to answer to many more people that own his baby, and should the stock price fall below the IPO level, the barbarians surely will arrive at the gate.  Which makes me wonder why the company is aiming for such an immediate high valuation in the first place.  “Under promise and over deliver” has been a mantra that has served many CEOs well.
 
As I make my final inspection of my son’s school clothes it also occurs to me that Mr. Zuckerberg might want to leave his signature hoodie at home and don a suit now and then. Growing up is hard, but if you want a $100 billion valuation, you need to play the part.

 

— PondelWilkinson, investor@pondel.com
 
 

JOBS Act to Jumpstart IPOs

IPO

By most accounts, the JOBS Act will likely become law and the rules for new issues should help to streamline and ease the IPO process.
 
Yesterday, the Senate passed he Jumpstart Our Business Startups Act (JOBS Act) (73-26 votes) with broad bipartisan support.  Its version of the JOBS Act will require approval from the House of Representatives (remember that a few weeks ago the House voted 390-23 in favor of a similar version of the law), after which it will go directly to President Obama’s desk for signature.  The White House has previously endorsed the legislation.
 
According to a recent report from the legal minds at Latham & Watkins, the JOBS Act, which is a combination of several different bills, contains certain IPO-related provisions related to corporate governance and financial reporting standards that should:

     

  • make it easier to go public;
  • provide significant cost savings for the IPO process;<
  • allow issuers to gauge investor interest before filing a registration statement;
  • permit confidential initiation of the SEC registration process;
  • streamline the requirements for financial statements;
  • permit analyst research immediately after the IPO; and
  • provide transitional relief for some companies up to five years from more costly requirements such as hiring an independent auditor.

 
Those supporting the bill believe it will encourage small businesses to grow and hire more workers. Further streamlining the IPO process enables companies to gain access to needed growth capital to fuel their expansion needs.  Reducing red tape should give an added boost to entrepreneurs seeking to launch new business start-ups, but it also could spur others to illicitly benefit from less stringent rules at the Securities and Exchange Commission.
 
While this should be viewed as a positive step forward, it also reminds investors of all stripes to carefully seek out and read all company filings before laying down the green.

 

PondelWilkinson, investor@pondel.com