Special purpose acquisition companies (SPACs) are the hot new investment banking trend.
Considered for your approval. Instead of hiring an investment bank, filing documents with the government and conducting a “road show” of endless questioning, hedge fund sharpies now go public with a blank check and use the cash to take you public.
This offers opportunities for small investors but also puts more responsibility on you. You can bet on funders before they fund anything. You can buy a company sight unseen. But you may also find yourself buying some hedge fund sharpie’s garbage. That’s the risk that comes with SPACs.
In recent months, this last risk has taken some of the shine off the SPAC boom. How would you like to bet on the founders of TIBCO Software, sold to private equity in 2014, only to find yourself holding stock in WeWork?
This week, I took a deep dive into the SPAC phenomenon, looking at some of its players, its layups and its offensive fouls.
- Social Capital Hedosophia
- Social Capital Hedosophia V (NASDAQ:IPOE)
- BowX Acquisition (NASDAQ:BOWX)
- Apex Technology Acquisition (NASDAQ:APXT)
- Churchill Capital IV (NASDAQ:CCIV)
- VG Acquisition (NASDAQ:VGAC)
- Pershing Square Tontine Holdings (NASDAQ:PSTH)
- Soaring Eagle Acquisition (NASDAQ:SRNGU)
SPACs: Social Capital Hedosophia: The Great Gatsby of the SPAC Trend
Chamath Palihapitiya and his Social Capital Hedosophia group (Hedosophia is a London-based investor) is the first name on this list of SPACs.
Palihapitiya uses “IPO” in the ticker symbol of all his SPACs. There are six now; there are seven more being formed, and his plan is to use the whole alphabet.
Three companies have gone public through the group so far. Virgin Galactic (NASDAQ:SPCE) was once IPOA. Opendoor Technologies (NASDAQ:OPEN) began life as IPOB. Clover Health Investments (NASDAQ:CLOV) started as IPOC.
Palihapitiya has gained riches through his SPAC sponsorships. The Canadian immigrant, born in Sri Lanka, was recently estimated to be worth $1 billion. Investors in IPOA have nearly tripled their money in SPCE. But Opendoor is now down year-to-date. Furthermore, Clover Health is down 56% on a negative report from short seller Hindenburg Research.
Palihapitiya has also made himself a celebrity. He has said that all he needs do to take a company public is go on CNBC and talk about it. He does have the gift of the gab. He was a big booster of Gamestop (NYSE:GME) and, more recently, of Bitcoin (CCC:BTC-USD). He also likes to talk about fair housing, immigration reform and how Wall Street rips off small investors. Recently, he charmingly beat back a rumor he might run for California governor.
Social Capital Hedosophia V (IPOE): Will SoFi Break Chamath’s Losing Streak?
Social Capital Hedosophia V may break Chamath Palihapitiya’s two-stock losing streak. It’s taking SoFi public.
SoFi is familiar to football fans. It has the naming rights on the new LA Rams stadium. Furthermore, it got its start offering student loans but has since become a full-fledged banking, finance and brokerage company. The bank is Golden Pacific Bancorp of Sacramento. And the brokerage will compete directly with Robinhood and plans to offer early access to pre-IPO stocks through its app.
The company’s aim is to become “the Amazon (NASDAQ:AMZN) of fintech,” offering every possible type of account and investment through its mobile app.
The Jeff Bezos of SoFi is Anthony Noto, a onetime Goldman Sachs investment banker who helped take Twitter (NASDAQ:TWTR) public and served as its chief financial officer. He was also once chief financial officer for the National Football League, which explains the naming rights deal. If, like me, you’re the kind of investor who likes to bet the jockey instead of the horse, you can do a lot worse than Mr. Noto.
Public investors are getting very little of SoFi through IPOE. But those of sporting blood might want to look at Renren (NYSE:RENN), an early investor in SoFi. That investment was hived-off, along with others, by a Chinese capitalist. But an Israeli, Seth Fischer, has bought a big chunk of RENN and is trying to undo that deal.
Buying RENN now may get you SoFi shares at a discount.
BowX Acquisition (BOWX): Let’s Buy WeWork
Next on our list of SPACs is BowX Acquisition, which is taking WeWork public.
SPACS all begin life with a nominal value of $10/share. If they don’t find something to buy in two years, investors can get that money back. BowX launched near that price in October, then slowly ground up to over $11 in February. The “tech wreck,” inspired by economic reopening favoring non-tech companies, sent the shares down.
But when the WeWork deal was announced March 26, the shares rose 20% in a day. Today, they trade at nearly $14/share. The SPAC launched by Vivek Ranadive and Murray Rode seems like a home run.
After all, WeWork was once valued at $47 billion before its failed initial public offering (IPO) in 2019. The BowX deal values it at $9 billion. But WeWork has lost $6.7 billion in just the last two years. Its chief competitor has also gone bankrupt. WeWork now calls itself an asset-light platform for managing flexible space.
Maybe this will work. Founder Adam Neumann, due to be played by Jared Leto in a forthcoming TV series, will have no role at the new company. But he will own 9%. Instead, you’re going to get Shaquille O’Neal.
Apex Technology Acquisition (APXT): Everything a SPAC Should Be
The best SPACs and IPOs come from founders and venture funders looking to cash out a great opportunity.
That’s what Apex Technology Acquisition looks like to me.
Apex was formed by Bessemer Venture Partners. If the name sounds familiar, and not at all techie, it dates from the family office of a steel magnate founded in 1907. Bessemer has been an active venture capitalist in Silicon Valley since 1975. It’s the kind of pedigree you look for in good racehorses.
Apex is bringing a company called AvePoint to market. It’s a Microsoft (NASDAQ:MSFT) partner that has won $290 million in funding over the years. But the turning point for AvePoint was its decision to follow Microsoft into the Azure cloud, committing to the Software as a Service (SaaS) model.
AvePoint is now a leading backup system for Microsoft Office 365 and Sharepoint files. Its AvePoint Virtual Assistant (AVA) automates the process of finding lost content. The result has been sustainable growth of 31% per year.
This is a good deal for you, and a good deal for Bessemer. The IPO process will cost it just $49 million. Existing shareholders, employees and their venture capital partners will retain 72% of the company. The deal is priced at $2 billion, which is nine times expected 2021 revenue of $194 million.
Churchill Capital IV (CCIV): A Bet to Beat Tesla
Churchill Capital IV, a SPAC founded by New York investor Michael Stuart Klein, is aiming to take Tesla (NASDAQ:TSLA) down. The vehicle is Lucid Motors, an electric vehicle (EV) startup it’s taking public.
Tesla is worth more than most of the car industry combined. But until now, no one has really copied its business model, which is not so much to sell cars as to act as a technology platform. That’s precisely what Klein’s Lucid, headed by former Tesla engineer Peter Rawlinson, aims to do.
Rawlinson knows that to do to Tesla what Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google did to Yahoo, he’ll need to scale quickly. Klein has been beating the bushes for Lucid investors. One of his bigger deals was $1 billion from the Saudi Public Investment fund, obtained in 2018. The investment comes with an agreement to build a factory in the Kingdom, a stipulation Toyota Motor (NYSE:TM) decided was too rich for it because of high labor costs.
Rawlinson also understands that scaling production of competitive batteries is key to competing. His answer is to build a battery factory separate from the cars and supply other car companies. He plans to recycle the batteries as storage devices once they lose 30% of their range. He also has a deal with Electrify America, a unit of Volkswagen (OTCMKTS:VLKAY), to support a nationwide network of charging stations.
VG Acquisition (VGAC): Buy 23andMe for the Database
Virgin Galactic head Richard Branson liked the SPAC trick that brought him public so much he’s trying it himself. His SPAC, called VG Acquisition, is now in the process of taking 23andMe public. Once the deal is done, the stock will trade under the symbol ME.
At first glance, 23andMe looks stale. Genetic testing has been around for years. There’s a lot of competition, and the company’s testing kits cost as little as $99 each. The pitch was to find out “where you come from,” based on regional genetic differences between peoples, and “what you’re at risk from,” based on genetic markers for disease.
The gold mine is the resulting database, which contains codes from 11 million people. The company began selling access to its database back in 2018. The idea is that, as with the famous Framingham Heart Study, researchers can use the database to identify patterns.
Collecting this kind of data is laborious but well worth it. I personally know someone saved from chemotherapy by an oncotype test, which compared the DNA of a breast tumor to that of millions of others. In medical research, the larger 23andMe database could prove even more valuable.
This was always the idea of co-founder Anne Wojcicki, now the ex-wife of Alphabet co-founder Sergey Brin. The company has already gotten clearance to release a study of its database involving two generic drugs, and the genetic markers that may indicate you shouldn’t take them.
Pershing Square Tontine Holdings (PSTH): Betting on Bill Ackman
You don’t have to wait until these SPACs have a target before you invest. You can buy one while it’s a blank check, based on who its sponsor is. If you really like hedge fund manager Bill Ackman, you can get some of his action buying Pershing Square Tontine Holdings today.
It’s a little like the game show Let’s Make a Deal. Ackman is Door Number One. Whatever he decides to buy with PSTH is what you get. You can even follow the action on Ackman’s Twitter feed.
What might you get? Tom Taulli has written about targets ranging from the home improvement chain Menards to the Wawa chain of gas stations to the online community Reddit. An Ackman retweet of Mongolian kids going to school has some speculating he might buy part of Starlink, Elon Musk’s network of low-orbiting satellites designed for broadband internet. The point is we just don’t know.
And there’s another point. The value of your stake will depend a lot on how much of the deal PSTH gets from its target. If the target is worth $100 billion, and PSTH wins 10% of it, that’s one thing. If the target is worth $100 billion, and PSTH gets 1% of it, that’s something else. You’re betting that Ackman is not only a good shopper but also can drive you a hard bargain.
Soaring Eagle Acquisition (SRNGU): From the Team That Brought You DraftKings
Instead of betting on someone known for his work with hedge funds, how about betting on someone known for their work in SPACs? That means buying Soaring Eagle Acquisition, launched by the team of Harry Sloan, Jeff Sagansky and Eli Baker.
As with directors, writers and producers of movies, you don’t know these guys, but you do know their work. This is the group that turned their first SPAC, called Flying Eagle, into DraftKings (NASDAQ:DKNG), which has more than tripled in value since it went public. They also took the mobile game platform Skilz (NASDAQ:SKLZ) public. It has traded as high as $46.30 per share.
The new SPAC has $1.5 billion to invest. The founders’ history is with online gambling. Thus, one potential target is G-Loot, which lets gamers find other gamers to play games. Another is Play Versus, which runs leagues for high schools and colleges with 20,000 members.
SRNGU might really take off if it gets into Epic Sports or its Unreal Engine. The engine is a system for creating virtual reality games and other entertainment. Epic’s biggest investor is Tencent Holdings (OTCMKTS:TCEHY), a Chinese company under pressure from the government there to come home and slim down.
That’s the thing with SPACs that haven’t announced a target — anything’s possible.
At the time of publication, Dana Blankenhorn directly owned shares in MSFT and AMZN.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.