The Pros and Cons for Buying Social Capital Hedosophia Holdings V as the Merger Approaches

Social Capital Hedosophia Holdings V (NYSE:IPOE) announced in early January that it was merging with SoFi, the California-based financial services platform that helps people improve their finances. Since the announcement, IPOE stock motored to $28 in early February before running out of steam.

An image of wooden blocks that say SPAC over a series of one dollar bills.

Source: Dmitry Demidovich/ShutterStock.com

Now trading around $16, the fact that the SPAC only took 91 days from pricing its IPO shares to announcing a combination has me wondering if a quick courting period is a good or bad thing. 

On one hand, it could easily be a case of pulling the trigger when you’re sure that you’re sure, but it’s reasonable to worry that this is a company that’s burning through IPOs because it can.

Here’s my take on both sides of the argument.

IPOE Stock Will Benefit From Quick Turnaround

The Social Capital Hedosophia investment group filed seven new special purpose acquisition company (SPAC) names in mid-February. Of the six existing SPACs with raised capital, only the fourth and sixth are still searching for a target.

Obviously, Chamath Palihapitiya has some merger candidates in mind, or he wouldn’t have filed the seven new SPAC names. I would bet dollars to donuts that the venture capitalist already had a good idea SoFi would be the merger candidate for Social Capital Hedosophia’s fifth SPAC when it priced its IPO in October. 

Finding good candidates to buy isn’t easy. It takes a lot of legwork and going down plenty of dead-end roads in search of that one suitable combination. Just ask Warren Buffett what it’s like. He’s gotten so tired of searching for dance partners that he bought back $25 billion of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) stock in 2020. 

The SPACs that I would worry about are those that are 18 months into the 24-month search without finding a candidate. Those are likely to let their criteria slide a little to ensure they don’t get to the altar alone. 

With IPOE, Palihapitiya has found a fintech company in SoFi that is growing rapidly by meeting average Americans’ financial services needs. It offers customers help with student loan refinancing, mortgages, personal loans, credit cards, investing and banking.

According to its announcement, SoFi is on track to hit $1 billion in revenue in 2021 and full-year adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) profitability. 

Ironically, I wondered in July if Bill Ackman’s SPAC should be interested in SoFi. Palihapitiya beat him to the punch. At the time, I argued that despite losing money, Ackman should definitely kick the tires. 

A big reason for my excitement has to do with Chief Executive Officer Anthony Noto, who was hired away from Twitter (NYSE:TWTR) in 2018, to fix a broken corporate culture and get it on the road to profitability. 

The company paid $1.2 billion for Galileo Financial Technologies in April 2020. The company’s technology enables Robinhood and Chime to offer its customers digital banking services. It’s now taking its services globally with a big push into Latin America, where the democratization of payments could really help grow the region’s economy. 

So, IPOE’s getting a fintech on the cusp of greatness. It probably didn’t take Palihapitiya very long to figure out SoFi was a good fit.     

The SPAC Should Have Kept Looking  

The length of time it took SPACs to announce a combination fell in 2020 to 4.6 months from 11.8 months a year earlier. SPACs got better at making decisions, and potential targets got more comfortable with the investment vehicle. 

However, even with the dramatic drop in the time needed to make an announcement, IPOE managed to find SoFi almost two months faster than the average. 

Bill Ackman’s SPAC went public in July 2020. Pershing Square Tontine Holdings (NYSE:PSTH) is still looking more than seven months later. I suppose it’s harder to reach a deal when you’ve got $4 billion in cash to invest in any transaction because it increases the size of possible targets.

Further, the fact the people behind Social Capital Hedosophia are well connected and experienced in making technology investments likely helped speed up the process. That said, Bill Ackman is also a pretty savvy and well-connected investor, so the argument cuts both ways. 

I guess we won’t know for several years which SPAC found the better target.

At a pro forma market capitalization of $15.2 billion — 865.1 million shares multiplied by $17.57 — IPOE is currently valued at 15 times its 2021 sales. That’s not outrageous, given Square (NYSE:SQ) trades for almost 13x sales.

As they say, “A bird in the hand is worth two in the bush.”

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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