This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Wednesday, December 8, 2021
Blank-check companies have matured, but still look like the 'Wild West'
It’s been a rough week for special purpose acquisition companies, the funding vehicles better known as a SPAC.
Once upon a time referred to as "blank-check" companies, SPACs are firms that go public with the express purpose of raising capital to merge with or buy another entity. Evolving with the times, SPACs gradually shed the baggage that accompanied the “blank check” label, along with the questionable practices associated with it.
According to SPACInsider data, there have been nearly 600 SPAC IPOs this year, more than double 2020’s figures, with gross proceeds totaling over $155 billion. The average IPO size in 2021 has been a whopping $270 million.
With all the money sloshing around in this corner of the market, it’s safe to say that the sector has mostly succeeded in putting its checkered past in the rear-view mirror.
Which is why developments over the last few days have been so noteworthy, in that they’ve featured several high-profile issuers caught in a maelstrom of bad press, and highlights how a seemingly hot trend that looks like a one-way bet can easily go wrong.
Like cryptocurrency — another market that holds great promise for the future but is clearly in need of at least some policing lest investors get burned — it's clear that SPACs also have maturing of their own to do. And increasingly, regulators are poised to play the role of parent.
Viral news platform BuzzFeed (BZFD) went public on Monday in a deal that valued the company at $1.5 billion — but the stock shed nearly half of its value in just two trading sessions, amid backlash from employees who accused the merger of doing little except enriching a clutch of insiders.
Separately, the ironically-named Better, a mortgage and real estate startup backed by SoftBank, set tongues wagging when its CEO unceremoniously fired 900 employees in the U.S. and India via Zoom — then defended his decision by accusing them of not being productive enough. Late Tuesday, Bloomberg reported that Better was delaying its SPAC deal to seek new regulatory approval with fresh terms.
Meanwhile, high-end electric vehicle startup Lucid (LCID) came under scrutiny — and heavy selling pressure — as it revealed it received a subpoena from the SEC over its recent $24 billion blank-check tie-up.
Yet, the award for this week’s most ignominious public relations blunder is the Trump Media & Technology Group, the vehicle associated with the 45th president who may yet launch a new effort to become the nation’s 47th.
Since Digital World Acquisition Corp. (DWAC) announced a deal to take Trump’s endeavor public in late October, the stock has seen explosive growth. Yet for a host of reasons, the deal's thin specifics and questionable governance make it look suspiciously like "the revenge of Four Seasons Landscaping," as Yahoo Finance's Rick Newman wrote on Tuesday.
The market currently values the SPAC at somewhere close to $7 billion. But as Bloomberg columnist Matt Levine pointed out this week:
The public market, I should emphasize, is saying that based on nothing. As of last Friday, there was absolutely no financial or technical or business information about TMTG available to the public; so far there is almost no sign that TMTG is actually building a social network or a streaming platform or anything else.
Meanwhile, all sorts of questions are surfacing about the deal, which is now the subject of a Securities and Exchange Commission (SEC) probe. In a filing, Digital World insisted that “investigation does not mean that the SEC has concluded that anyone violated the law.”
The mass of negative headlines underscore how the booming yet still underdeveloped sector still has a lot of house cleaning to do — and a need for oversight to prevent bad governance, malfeasance, or outright fraud.
“It’s been fascinating to watch [SPACs] go from lender of last resort to a very viable option,” Jordan Nof, a co-founder and managing partner at Tusk Venture Partners, told the Morning Brief in a recent interview.
However, Nof added that “there’s a ton of work that has to happen on the alignment of incentives between the sponsor, and there’s got to be some regulations.”
Although the investor said the SPAC model comes with lots of advantages, he said certain elements of the market are “still guns blazing, Wild West,” and still very dependent on select narratives.
“There’s a lot of non-qualified financial sponsors out there that raised money really quickly, really easily in a market that nobody really understands that well,” Nof added.
And as a clutch of companies rush toward the 2021 finish line with new SPAC deals, it suggests there could be more unpleasant surprises in store for investors.
Yahoo Finance Highlights