by Barbara Clarke
Wall Street reporting loves a good hype story, and that story lately has been about all things SPAC. By now, folks know that SPAC stands for Special Purpose Acquisition Company. An investor creates a legal entity and then invites other investors to buy into this “shell” of a company with the goal that it will acquire an interesting company or collection of companies. That company then files paperwork with the Securities and Exchange Commission (“SEC”) and is listed on a stock exchange. Then individual investors can purchase shares before the company makes a single acquisition.
Many of us see SPACs as just a means to go public, perhaps faster and perhaps more easily. If we look back to pre-COVID financial news, one of the biggest stories was the proposed IPO of WeWork, which was following a traditional IPO process. WeWork produced its S-1, which is a disclosure report that the SEC requires. I read that document, as did many others, and it revealed a trove of issues with the company that even the best creative writers in business couldn’t dress up. The IPO plan was withdrawn when it was clear that the company would not get the price that it wanted. In my opinion, the IPO process did its job, disclosing the huge flaws in WeWork and protecting investors from a clearly bad investment.
SPACs have been around for a long time, and there are other similar legal arrangements whereby a company merges with a publicly traded company and now the whole entity is listed on the stock market. Warren Buffet famously acquired Berkshire Hathaway, a dress shirt manufacturer in the 1960s, and eventually made it a powerhouse holding company.
There are lots of interesting rules regarding a SPAC such as a time limit for how long it can operate without an acquisition. Also, investors have the option to take back their investment if they don’t like the acquisition. I’ve had an interesting time going down the SPAC rabbit hole.
Making IPOs or similar exits easier is probably, overall, a good thing. Investors in early stage companies have been bemoaning the lack of exits and the length of time to exit. Going public has always been seen as a rare, but often lucrative exit.
In my portfolio composed predominantly of women-led and/or people of color-led companies, I have a number of companies considering how to exit, either through a traditional IPO or through a SPAC. One of my CEOs was telling us how enticing some of the SPAC offers were for her personally because many SPACs were courting CEOs with promises of high cash payouts. This reflected a frenzy to find SPAC-worthy companies. It is my understanding that the market has shifted, and the supply and demand of deals has evened out. Every entrepreneur in my portfolio that is past a certain development stage is at least considering a SPAC. The joke is that the “SPAC is the new Series B,” but I think that is probably too early in their lifecycle for most companies to consider.
The hype around SPACs can be a distraction but good investors can see through the hype and evaluate the opportunity. WeWork is finally going to go public, but this time through a SPAC at a current valuation discount of 80% off its previous IPO target. Many investors are wondering whether that discount is enough to make it palatable.
Whether a company goes public via a SPAC or a traditional IPO model, the important issues don’t change. Is the company ready to be publicly-traded? Does it have the market potential, the oversight, and the team to be successful? Can it comply with the disclosure requirements? As an investor, I think about what happens on Day 2 after the IPO or after the SPAC acquisition. That is when a company starts to prove its value.
For me, I think this will be a good summer for companies to go public, and some of them will certainly be SPAC-tacular, and others will be following a more traditional IPO route. I can’t wait to see how it all turns out. Stay tuned.