“What has happened is, overall, M&A activity is close to an all-time high,” a private investor, who preferred to stay anonymous, told TheWrap. “Just as the stock market has been doing so well. Whether it’s you or me or institutions, everyone wants to make money on their money.” He explained that “historically, interest rates were between 3 and 5%.” Now, with interest rates at or near 0%, people are looking for ways to make money.
The biggest benefit for a SPAC, he said, is that it provides more certainty because a lot of work is done early on to focus on what company will be acquired. “You know exactly the type of company they will be trying to get. Once they put together the prospectus and they raise the money it’s basically money locked in to buy a company. It provides certainty that there is money set aside, and it’s been pre-approved. Versus an IPO, they have to go through their own process; whereas, this gives certainty to sellers that I can get some liquidity.”The SPAC investor agreed that SPACs are more streamlined than IPOs, where executives aren’t allowed to give projections. Moreover, it’s much more efficient time-wise because with a SPAC, someone has already done the IPO process. “In a SPAC IPO, we take investors over the wall; we’re already public, and we bring management to meetings with these investors, and they can meet multiple times with investors, understand the company; they can talk about forward projections,” he explained. “That price discovery process allows investors to much more clearly understand the prospects of a company.”
It’s not just beneficial for a buyer, but also for the seller, the private investor said. “From a seller’s perspective, it’s beneficial because you know these people have limited time; there are incentives for them to do it. It’s been one of the biggest bull markets in the stock market in history and people think it’s going to continue because of monetary policy and stimulus,” the investor said.Michael Queller, a professional trader based in South Florida, said SPACs essentially offer a “backdoor” for companies looking to go public quickly and affordably. “If you go the traditional way, it’s very expensive, ” Queller explained. “You have to pay your investment banker millions upon millions of dollars, so you have that hurdle. And then you have listing requirements with Nasdaq, which is another hurdle. The big reason people don’t like it [traditional IPOs right now] is it’s so expensive. Versus SPACs, they’re already publicly traded. You basically make whatever deal you want. You shake hands, and you can be public in 90 days for a much smaller amount of money than going the [IPO] road.” “SPACs are an efficiency tool for sponsors and private growth companies alike. It’s been building since the post-dot-com Sarbanes Oxley antifraud law forced many costs and logistics on small companies that kept them from going public,” Dempsey said. “SPACs are inspirational in a certain way: an experienced deal hunter, like a talent agent, can find the promising talent, put them into the public limelight, and if they’re right, they both get a payday and the investor crowd get to enjoy that new public company. It’s one and done — the SPAC sponsor doesn’t have to cross-collateralize the results of their deal against a diversified pool of investments like a private equity fund does and have to wait 12 years to determine if it was a home run or not financially.” While SPACs are booming, they didn’t always have the best reputation. The professional investor who spoke to TheWrap explained that in 2007, SPACs didn’t perform well. Sloan told the LA Business Journal in September: “In the early days, SPACs had a bad name. You never wanted too much publicity as a SPAC guy when we started this in 2011.” But now, the advantages for a SPAC clearly outweigh the disadvantages. “For a long time, people said, ‘There’s so much risk; you give it all back after 18 months,’ and for a long time, people said, ‘Why would you do that?’” the SPAC investor said. “But look at all the other advantages — if we are successful, we get paid really well!” And it’s pretty low-risk, given that investors get their money back after two years if the SPAC doesn’t find a company to take public. “If they don’t make any deals, the pile of money will still be there and all the investors will get back the money they invested, so there’s very little risk,” Queller said. “Everybody is financially motivated to make a deal: Everybody from the manager if there’s a deal, to the investors, to the people who they’re negotiating with, make money if they make a deal, so everybody wants to make a deal, which is making it very easy to make [SPAC] deals.” According to both insiders, SPACs are not suitable for every company interested in an IPO, especially due to the potential for higher costs of capital. “If you are in a business with a lot of comps, and if you are a fourth-level company, for example, you don’t have to go into SPAC. You already know where it’s going trade,” the SPAC investor said. “For them, it’s less expensive to go regular IPO… A lot of the people getting into SPACs are first-time issuers, and they don’t fully appreciate how hard it’s going to be.” And SPACs don’t work for every type of company. Production companies and mini studios, like STX and MGM, would be “disastrous with SPACs,” the SPAC investor said.
“They shouldn’t be public companies,” he said. “SPACs work best for companies that are digitally engaged with consumers, like ecommerce — fast-growing companies.”