Are we still doing this? That’s what I thought when I sat down to write about Pershing Square Tontine Holdings (NYSE:PSTH). Since I last wrote about PSTH stock, it seems that investors are beginning to be asking the same question. After all, the whole idea of betting on a jockey rather than a horse only goes so far.
In February, PSTH stock was climbing above $30 per share. Since then, the stock has been trending towards the $20 mark. That’s where it began trading. While I’m not sure it will break below the $20 mark, there’s little reason to think it will climb significantly higher without investors knowing the company with which it will merge.
And, as InvestorPlace columnist Mark Hake recently wrote, finding a target may not be an easy task for Pershing Square Tontine. Ackman has a considerable amount of money to bring to the table; he may have as much as $10 billion, including debt.
And when more hedge funds get involved, that number could increase to $15 billion. According to Hake, “Assuming that the target is twice as large, the deal valuation would be at least $30 billion.” Hake went on to point out that a $30 billion valuation significantly limits the number of potential targets.
A Different Kind of March Madness
The NCAA National Basketball Tournament (aka, March Madness) recently reached its conclusion. And the process by which many brackets bust seems curiously like the process of investors wagering on a SPAC whose target has not been announced yet.
Both those who fill out NCAA brackets and investors in SPACs with unknown targets add or subtract picks based on rumors because the facts are being closely held. It’s maddening.
And SPACs are generally risky investments for retail traders. Every SPAC’s sponsor (in the case of Pershing, that would be Ackman) gets 20% of the deal’s proceeds no matter what. The good news for investors is that 20% is a powerful incentive for completing a deal. But on the other hand, it may cause sponsors to overpay for a target.
And retail investors get caught in the middle, deluged with claims about future performance from companies that are not subject to the same scrutiny as those that go through a typical IPO.
When Will We Know Who the Target Is?
That’s the ultimate question that investors have when buying the shares of a special purpose acquisition company (SPAC). A SPAC is an alternative to a traditional initial public offering (IPO). Ultimately, it’s about an individual (in this case, it’s Bill Ackman) with a pile of cash.
Companies going public with SPACs is nothing new. However, the market has grown considerably. In 2019, a total of 59 SPAC stocks came to market, raising $13.6 billion. Last year, both numbers exploded. The total number of SPACs grew to 248, and they raised $83 billion.
And as many investors discovered in 2020, when a SPAC announces its target, its stock can make a giant move in one direction or another.
What’s the Cost of Being Wrong on PSTH Stock?
Those who buy the stock at a high price are looking at a loss if investors don’t like the target that’s announced. On the other hand, those who stay on the sidelines risk missing out on the surge that will occur if Ackman hits a home run or at least a solid double.
With PSTH stock trading at around $25 per share, the cost of being wrong is a lot less than when the shares were above $30. And nearly 70% of the shares are owned by institutional investors, so there’s little risk of them dropping sharply until a target is announced.
But Ackman is attempting to pull off an extremely large, likely complex SPAC deal. But as Hake points out, an appropriate target may not exist. At the very least, there may be very few compelling candidates for Ackman.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.