SPAC Man Begins(alexdanco.com)
alexdanco.com
SPAC Man Begins
https://alexdanco.com/2020/07/24/spac-man-begins/
16 comments
Spac is slang for stupid in England. Might want to reconsider the name.
It's worse than that, it's a nasty insult for disabled people from "spastic" (also used: "spaz" which may be familiar to US readers and is much more derogatory in the UK).
It's got terrible connotations in the UK.
https://www.wikipedia.org/wiki/Spastic
It's got terrible connotations in the UK.
https://www.wikipedia.org/wiki/Spastic
I mean, we have git so I think we'll survive.
"Git" is not even remotely close to the nastiness of the words here.
Yeah, whatabouting a bad decision is definitely a reason to give up on preventing other bad decisions.
Does anyone know how one should go about learning about all these different financing methods / vehicles if I wanted to read about it by myself? And say for some reason I wanted to do an IPO/finance through a SPAC or something myself, where would I start and what would I need (assuming I don't want to hire some investment bank for me).
I used to work as a trader at an investment bank and I've always been curious about the corporate finance side of the business. I have a friend who worked in corp finance at a boutique IB and struck out by himself. He eventually ended up running his own boutique bank in China and deals almost exclusively with SPAC's by helping his Chinese clients list on Nasdaq or whatever. I was always curious how he did it and what one needs to do if he wanted to follow a similar path
I used to work as a trader at an investment bank and I've always been curious about the corporate finance side of the business. I have a friend who worked in corp finance at a boutique IB and struck out by himself. He eventually ended up running his own boutique bank in China and deals almost exclusively with SPAC's by helping his Chinese clients list on Nasdaq or whatever. I was always curious how he did it and what one needs to do if he wanted to follow a similar path
So basically this article describes how not to give Wall Street crooks your money and instead keep more money for Silicon Valley crooks. Whats up with this "system" talk? Jeez I think SV types on the west coast need to grow up a bit. He even admits trying to SPAC a crypto company. That is more system than the system itself.
Not even that; the author didn't think through the math right. A SPAC is much more expensive than an IPO:
1. Sponsor takes 20% 2. Warrants give investors the right to buy buy shares cheaply 3. You still get the IPO pop (Nikola and DraftKings both had enormous pops after becoming public)
1. Sponsor takes 20% 2. Warrants give investors the right to buy buy shares cheaply 3. You still get the IPO pop (Nikola and DraftKings both had enormous pops after becoming public)
When you IPO you sell a (usually) significant percentage (generally from 20% to 80%) of your company for an opening price - you don't get to capitalize on the hoped-for increase except with the percentage you didn't sell, either personally or corporately, as there are usually many limitations to discourage loss of the established personnel to sudden wealth syndrome. In the SPAC (and similar) models, you "sell" 20% of your company for a fixed amount (in exchange for the SPAC's cash). The remainder is yours to nurture as needed. With a little planning you avoid a lot of work generally irrelevant to your core business by finding an available company to be acquired by and who is by experience a good partner for publicly traded relationships.
Obligatory Matt Levine take[1]
> I just want to spell it out a bit here because, again, the common story these days is that a SPAC is a substitute for an IPO that is cheaper and avoids mispricing. I have argued before that that is wrong, but in particular here I want to point out that the SPAC is (sometimes) a marriage and an IPO generally isn’t.
> An IPO is, you sell stock to some people who want to buy it, and in general you hope that they’ll be good stable long-term investors, but you don’t lock them up forever. They get to vote for directors, usually, but the big IPO investors don’t generally get their own representatives on your board. And in particular, the trend in tech unicorn IPOs in recent years has been to minimize the power and input of public investors. Lots of tech unicorns go public with dual-class stock so that investors can’t really vote for directors; the founders’ goal in going public is to raise money (or at least get liquidity for early investors) but keep control of their companies for themselves. They are not looking for a marriage partner; they are looking for a transaction, for money, while keeping their independence.
> Which is fine too! Some companies stay independent, some merge, some want something in between, a powerful outside shareholder who can give them advice and support. My point here is just that if you are a tech unicorn founder, and your goals are (1) to go public without giving up any control to outside public shareholders and (2) to go public without going through the vagaries of the IPO process, you may have to make some tradeoffs.
[1] https://www.bloomberg.com/opinion/articles/2020-07-24/goldma...
> I just want to spell it out a bit here because, again, the common story these days is that a SPAC is a substitute for an IPO that is cheaper and avoids mispricing. I have argued before that that is wrong, but in particular here I want to point out that the SPAC is (sometimes) a marriage and an IPO generally isn’t.
> An IPO is, you sell stock to some people who want to buy it, and in general you hope that they’ll be good stable long-term investors, but you don’t lock them up forever. They get to vote for directors, usually, but the big IPO investors don’t generally get their own representatives on your board. And in particular, the trend in tech unicorn IPOs in recent years has been to minimize the power and input of public investors. Lots of tech unicorns go public with dual-class stock so that investors can’t really vote for directors; the founders’ goal in going public is to raise money (or at least get liquidity for early investors) but keep control of their companies for themselves. They are not looking for a marriage partner; they are looking for a transaction, for money, while keeping their independence.
> Which is fine too! Some companies stay independent, some merge, some want something in between, a powerful outside shareholder who can give them advice and support. My point here is just that if you are a tech unicorn founder, and your goals are (1) to go public without giving up any control to outside public shareholders and (2) to go public without going through the vagaries of the IPO process, you may have to make some tradeoffs.
[1] https://www.bloomberg.com/opinion/articles/2020-07-24/goldma...
There is an older and less flattering term for this. It's called a reverse merger. Typically, you start with a company that sold aluminum siding in the seventies and has no assets but happens to still be on a public Exchange.
They call this the vehicle. The rest works just like the article says, you merge the shell company in with the company that actually has value and avoid the IPO process.
As the article honestly points out, the whole point of this is to avoid the scrutiny that you typically get from an investment Bank. It also skirts the spirit of a number of regulations put in place to keep people from losing their retirement nest egg on snake oil.
They call this the vehicle. The rest works just like the article says, you merge the shell company in with the company that actually has value and avoid the IPO process.
As the article honestly points out, the whole point of this is to avoid the scrutiny that you typically get from an investment Bank. It also skirts the spirit of a number of regulations put in place to keep people from losing their retirement nest egg on snake oil.
I'm missing what is good for a company when they go through a SPAC the 20% fee is close to what the average POP for an IPO which historically has been 13-15% and last year was 22%[1]and in exchange for dealing with a bunch of investment bankers you get to give up a board seat at best or being the CEO of your company to the promoter. Is it really just to dodge regulations?
[1]https://www.cnbc.com/2019/05/09/the-ipo-market-started-stron...
[1]https://www.cnbc.com/2019/05/09/the-ipo-market-started-stron...
The general tradeoff here is:
An IPO is a difficult, involved process. You jump through a lot of hoops, you have to write a bunch of documents, you do a road show, and at the end of it you don't even know how much money you're going to raise. As with WeWork, it's very possible the IPO may be derailed before it gets to the end, or the price will be cut in order to get it done (meaning you don't raise what you expected). Plus, the price may drop after the IPO (meaning many of your new investors are mad and you get bad press), or it pops a bunch after the IPO (meaning many of your old investors are mad and you get bad press). It's not a great process! On the other hand, you'll probably get something a bit like a market price - as you note, IPO prices tend to be within 15-20% of the eventual market price.
A SPAC is different. You talk to one guy (or team, at any rate), you negotiate a deal for a fixed price, you sign, it's done. Sure, it's very, very expensive, because you're paying to get rid of that risk, but maybe you really hate risk?
(Note: the 20% fee is only one part of the cost of the SPAC. And there's still a chance of a pop, as with Nikola who surged enormously. Much of the money they raised was at $10 per share, but they closed at $33.97 on the first day, and $53.95 a month later. Good deal for some...but not for Nikola or their original investors.)
An IPO is a difficult, involved process. You jump through a lot of hoops, you have to write a bunch of documents, you do a road show, and at the end of it you don't even know how much money you're going to raise. As with WeWork, it's very possible the IPO may be derailed before it gets to the end, or the price will be cut in order to get it done (meaning you don't raise what you expected). Plus, the price may drop after the IPO (meaning many of your new investors are mad and you get bad press), or it pops a bunch after the IPO (meaning many of your old investors are mad and you get bad press). It's not a great process! On the other hand, you'll probably get something a bit like a market price - as you note, IPO prices tend to be within 15-20% of the eventual market price.
A SPAC is different. You talk to one guy (or team, at any rate), you negotiate a deal for a fixed price, you sign, it's done. Sure, it's very, very expensive, because you're paying to get rid of that risk, but maybe you really hate risk?
(Note: the 20% fee is only one part of the cost of the SPAC. And there's still a chance of a pop, as with Nikola who surged enormously. Much of the money they raised was at $10 per share, but they closed at $33.97 on the first day, and $53.95 a month later. Good deal for some...but not for Nikola or their original investors.)
A SPAC is much less of a headache for a company that wants to go public. Instead of having to talk to a whole bunch of investors to set a price for your stock you only have to negotiate with the SPAC. SPAC are usually quicker then an IPO allowing you to raise money faster.
The IPO pop is definitely giving away value to a bunch of well connected investors who have added no value. Facebook solved it by pricing high and using the greenshoe. Most companies don't seem to have enough leverage to get that and even with Facebook there were plenty of influential people berating them about it. But Google's solution of a dutch auction IPO seems like a more natural solution. To manage the discontinuity of the moment the company starts trading set up the trading book early with the auction and then start trading at a well discovered price. Why hasn't that become standard? Just the gatekeeping of the banks again? Seems like the natural thing to offer next for one of the companies that does markets for still private startups.
>"While the normal IPO process starts with a private business who wants to go public, a SPAC is the opposite: it starts with a public business, that is nothing.
A SPAC begins its life when a well-known promoter, like Chamath or Bill Ackman, raises money in an IPO with the following prospectus:
“I am raising money to take a company public. I don’t know which one yet; the money is going to go in a bag until I find one. When I do, my publicly traded bag of money will merge with the private business, and in doing so, take them public. You, the investors, will have your SPAC shares convert to shares in the new business, at an attractively negotiated price, plus warrants to buy more so you can profit on the upside.
Because I’m so smart, I’m going to pick a business that’s amazing and that you’ll want to own. If you disagree, you’ll have a chance to get your money back. But if I’m right, you’ll make a ton on the upside.”"
An interesting sales proposition, to be sure...
A SPAC begins its life when a well-known promoter, like Chamath or Bill Ackman, raises money in an IPO with the following prospectus:
“I am raising money to take a company public. I don’t know which one yet; the money is going to go in a bag until I find one. When I do, my publicly traded bag of money will merge with the private business, and in doing so, take them public. You, the investors, will have your SPAC shares convert to shares in the new business, at an attractively negotiated price, plus warrants to buy more so you can profit on the upside.
Because I’m so smart, I’m going to pick a business that’s amazing and that you’ll want to own. If you disagree, you’ll have a chance to get your money back. But if I’m right, you’ll make a ton on the upside.”"
An interesting sales proposition, to be sure...