This year, it may feel as though everything tied to special purpose acquisition companies (SPACs) is hot. The reality is, some SPAC IPOs are proving controversial and difficult places for investors to allocate capital.
Year-to-date, there have been 127 SPAC IPOs raising a combined $48.5 billion in proceeds. Also known as blank-check companies, SPACs provide a more efficient avenue for firms to go public. The phenomenon has brought well-known growth companies such as DraftKings (NASDAQ:DKNG) and Virgin Galactic (NYSE:SPCE), among many others, to market.
However, history confirms that many SPAC IPOs don’t deliver returns on par with comparable companies that went public the traditional route. Additionally, not all SPACs find a company to partner with, meaning the blank-check firm, if it doesn’t accomplish that goal within two years, is vulnerable to liquidation.
Here, we’ll examine some companies born of out mergers with SPACs that could be in for downside and some pre-deal blank entities that could be staring at imminent liquidation.
- Nikola (NASDAQ:NKLA)
- Hyliion Holdings Corp. (NYSE:HYLN)
- Leisure Acquisition Corp. (NASDAQ:LACQ)
- Tuscan Holdings Corp. (NASDAQ:THCB)
- Spartan Energy Acquisition (NYSE:SPAQ)
Nikola’s year-to-date gain of more than 120% is one of the more deceiving statistics investors will encounter. In terms of price action, what investors should focus on is that this aspiring electric vehicle maker was once a $94 name. It closed at $19.56 last Friday on the back of a 16.12% loss.
“Aspiring” is very much the issue with Nikola. Unlike a Tesla (NASDAQ:TSLA) or Nio (NYSE:NIO), Nikola currently doesn’t have a product on the market, meaning its revenue is scant and it makes no money. That’s the type of scenario short sellers sink their teeth into. At least one well-known research firm is making a related case.
Last month, Hindenburg Research published a report highlighting possible issues with Nikola technology, saying executives may be overstating battery capabilities while refusing to walk back those audacious claims.
These days, NKLA stock is highly dependent on a deal with General Motors (NYSE:GM) that may or may not come to fruition. It may not go to $0, but more downside could be in the offing for Nikola.
Hyliion Holdings (HYLN)
Hyliion’s situation is remarkably similar to that of Nikola. Both companies are SPAC IPOs and both are would-be manufacturers of electric trucks. More importantly, the stocks share the ominous decline trait. In the case of Hyliion stock, it flirted with $59 in late August before closing at $27 last Friday.
Moreover, Hyliion is making audacious claims about its battery technologies. So bombastic are these claims in the eyes of short seller Bonitas Research that the firm says Hyliion’s fuel efficiency claims are lies.
“Evidence revealed that Hyliion’s proprietary battery management system technology was purchased for under US$ 1 million, equal to less than US$ 0.01 per Hyliion share!,” according to Bonitas. “There is not one scientific paper or submission that would back up Founder & CEO Thomas Healy’s 30% fuel efficiency claim.”
Leisure Acquisition (LACQ)
It’s not that Leisure Acquisition is a bad SPAC. The issue here is time. As noted above, blank-check firms have two years to find a merger partner or face liquidation, and the clock is ticking on this SPAC. Its completion deadline is Dec. 1. Anything is possible, particularly with LACQ targeting gaming and leisure names – industries flush with SPAC IPOs this year.
What makes Leisure Acquisition’s situation unique is that it had a deal in place to merge with Canadian casino operator Gateway Casinos. However, that $1.15 billion transaction fell apart a few months ago and it’s not yet clear what either party’s next move is.
One thing is clear: Given the multiples markets assign to online gaming companies, if Leisure Acquisition can find a partner in that space over the next few weeks, LACQ stock would likely surge.
Tuscan Holdings Corp. (THCB)
Tuscan Holdings is in the same boat as Leisure Acquisition. It’s not necessarily a “bad” SPAC, but it is facing a time crunch with a looming Dec. 6 completion deadline.
The other similarity between these two blank-check firms is that Tuscan is shopping for deals in an arena that should be fertile territory for SPAC transactions, that being the cannabis industry. At the end of the second quarter, Tuscan had $282 million in cash, giving it the ammunition with which to strike a deal that could be valued at $1 billion or more.
The time is right for cannabis SPACs to find merger partners because more states could legalize marijuana on Election Day, a Biden Administration could be a boon for the industry, and the idea of recreational cannabis is gaining more bipartisan support. Tuscan just needs to act quickly to capitalize on these tailwinds.
Spartan Energy Acquisition (SPAQ)
The good news is that Spartan Energy Acquisition has a deal in place as its slated to bring EV maker Fisker public. That puts the blank-check company ahead of some of the other names highlighted here. While I’m loathe to say this is a SPAC on its way to $0, I have reservations based on the fact that the EV space is getting crowded quickly and not each new company is going to be the second coming of Tesla.
Speaking of Fisker competition, Tesla and others have a massive head start on the company because it’s going to be another two years before Fisker even commences production.
Another reason for caution with SPAQ is that Fisker previously existed and ultimately failed due in part to six-figure pricing on its Karma, which limited the audience. Fortunately, the company appears to have learned its lesson as its California, a smaller SUV, is priced from $37,499.
Bottom line is this isn’t the worst of SPAC IPOs, but it probably won’t be the best, either.
On the date of publication, Todd Shriber owned shares of DKNG.
Todd Shriber has been an InvestorPlace contributor since 2014.