Special Purpose Acquisition Companies (SPACs) are a special type investment company that do not have any operations of their own. They have recently gathered increasing attention as an alternative method of going public instead of the traditional IPO route. Today, I’ll discuss three companies that have recently made their stock exchange debut successfully through a reverse merger with a SPAC IPO.
The Security and Exchange Commission (SEC) classifies SPAC as a blank check company whereby its purpose is “to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.” Different SPACs are typically set up with different goals in mind. But in general, a SPAC raises money from investors to purchase a company and bring it to the public markets.
According to research by Yochanan Shachmurove of the University of New York and Milos Vulanovic of EDHEC Business School “as an investment vehicle, modern SPACs are traced back to 18th century England where blank checks were first mentioned as blind pools during the infamous South Sea Bubble.” The authors highlight several steps:
“SPACs are formally established when their underwriters, on behalf of management team, file Form S-1 with the SEC announcing intention to conduct an IPO in some future date … Once Form S-1 is certified by the SEC, the management team and underwriters conduct a number of preparatory moves for an eventual IPO and any relevant change to the initial form is immediately registered with the SEC. Just prior the IPO date, underwriters file final prospectus, Form 424–B, that reports all changes that have happened since the initial registration statement.”
In a recently submitted thesis at the Department of Finance at Texas Christian University, James Griffin says “Most SPACs begin trading at a price in the ballpark of $8-10 per share … [Following the IPO the SPAC] conducts a target company selection process, proposes an acquisition to its shareholder base, then acquires the company if its shareholders approve of the choice. SPAC managers are typically constrained by a two-year time horizon during which they must propose an acquisition target to shareholders.”
On the other side of the equation, by merging with a SPAC, a privately held company can avoid going through various steps and hurdles to go public or sell new shares. Not all reverse mergers with SPACs are necessarily successful. Many companies go below the $10-level and do not create much value for shareholders. Yet there are others that become quite successful.
Put another way, SPACs enable investors to bet on a leadership team’s ability to find a smart acquisition candidate within a two-year period. The share price of a SPAC usually goes up substantially after the merger announcement. And following the completion of the merger, the fate of the stock understandably depends on a plethora of factors. Therefore, potential investors in these companies should do their due diligence before investing their capital into the shares.
With that in mind, here are three companies that have gone public via the SPAC IPO route.
Let’s take a look at what makes each hold promise today.
Strong SPAC IPO’s: DraftKings (DKNG)
DraftKings was set up in 2012 as a daily fantasy sports platform. It went public in late April via a SPAC IPO, instead of a conventional IPO. It merged with Diamond Eagle Acquisition Corp., a SPAC that was already publicly traded and SBTech.
Diamond Eagle listed in 2019 at $10 a share. In December 2019, it announced that it would merge with DraftKings. Then Diamond Eagle changed its name to DraftKings. It also changed its ticker. In a matter of months, Diamond Eagle shares moved as high as $18.69. Boston-based DraftKings stock was officially listed on the New York Stock Exchange on April 24.
As a result, DKNG stock started trading on Apr. 24, 2020 at an opening price of $20.49. On June 2, it hit an all-time high of $44.79. Now, it is around $35.
In the U.S., DraftKings and FanDuel, which is part of the U.K.-based Flutter Entertainment (OTCMKTS:PDYPY), are the two main platforms for sports and sports fantasy betting. Recent research concludes that between 2020-2024, the U.S. fantasy sports market is expected to grow by $9.34 billion at a compound annual growth rate (CAGR) of 10%. Similarly, the U.S. sports betting market is expected to hit $5.7 billion by 2024.
Those investors who want to capitalize on the potential of sports betting as well as the growth in fantasy sports in the U.S. may want to consider doing further due diligence on DKNG stock.
Phoenix-based Nikola was founded in 2014. Earlier in the year, it merged with VectoIQ Acquisition Corp., a blank check publicly traded firm that was already listed on the Nasdaq. Nikola stock started trading on June 4 when it opened at a price of $37.55. On June 9, it hit an intraday all-time high of $93.99. Now, the shares are trading around $48.
Until recent weeks, the group concentrated on heavy-duty fuel cell trucks. A March press release stated the group had “more than 14,000 pre-orders representing more than $10 billion in potential revenue and two-and-a-half years of production.” The recent jump in Nikola stock mainly came after a tweet on June 8 by founder and chairman Trevor Milton.
On Twitter’s (NYSE:TWTR) platform he announced that the company would begin taking reservations for a new electric pickup truck, called the Badger in late June. Then on June 29, management announced that it was accepting pre-orders for the truck.
If you’re considering investing in Nikola stock for the long run, you may want to see how the next several quarterly reports come out. With a newly listed company (or SPAC IPO for that matter), it is important to see the trend in its fundamental metrics. For example, management expects the company to start generating revenue in 2021. It’s important to see if that will indeed happen.
If you’re looking for a recent SPAC IPO, then you may want to keep NKLA stock on your radar screen. The shares may come under pressure in the second half of the year. Long-term investors may consider buying the dips below $35.
Virgin Galactic (SPCE)
Virgin Galactic is part of Sir Richard Branson’s Virgin Group. He had previously founded Virgin Atlantic Airways which itself is owned in part by Delta Air Lines (NYSE:DAL). Virgin Galactic defines itself as “the world’s first commercial spaceline and vertically integrated aerospace company.”
The company went public on Oct. 28, 2019, via a reverse merger with a SPAC. Virgin Galactic’s SPAC partner was Social Capital Hedosophia (SCH) founded by venture capitalist Chamath Palihapitiya a as a SPAC. SCH was first listed in September 2017 with an opening share price of $10.
SPCE stock started trading on October 28, 2019, at an opening price of $12.34. On Feb. 20, the stock hit an all-time high $42.49. On March 18, they saw a low of $9.06. Now, they are trading at about $24.
If you’d like to be part of the fortunes of this first publicly traded space tourism company, you may want to buy the dips in SPCE stock.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.