16 ms·

Could IPOs be replaced by blank check acquisitions (SPAC)?

77 points by kaboro 6y ago

pmorici 6y ago
If the main dig against traditional IPOs is that they are miss priced I don't see how SPACs fix that. Two SPAC offerings in recent memory that I'm aware of, Virgin Galactic, and Nikola both had huge run ups soon after the mergers happened. This dynamic seems more likely to be a product of hype and limited available shares initially due to lockup periods.
- ketzo 6y ago
  But critically, the misprice is not what matters to the companies raising money. What matters to them is the amount of money they’re able to raise initially, and that can be higher in a SPAC deal. Or it could be lower! But it’s less volatile.
  - deleted 6y ago
    [deleted]
  - beervirus 6y ago
    But from first principles, it should basically always be lower.
    - ketzo 6y ago
      Yeah, but even if it's lower, the number is certain, decided on over the negotiating table. In an IPO, you don't know till the day of your IPO exactly how much you're going to raise.
      - dimes 6y ago
        When a company does an IPO, they hire an underwriter that guarantees that they'll sell a specific amount of stock at a specific price. So the company knows how much money they'll raise by the time the first day of trading arrives.
ketzo 6y ago
At least the way I understand it, SPACs offer a trade off, not an upgrade. The danger of an IPO (from the perspective of the company going public) is the “IPO Pop”: you offer your stock at $20, by the end of the first day it’s trading at $40, and you realize you left a bunch of money on the table. This is a benefit to the initial investors, who make a big profit day 1. The inverse risk is the opposite (see Lyft, Slack IPOs): you offer your stock at $20 and it ends the day trading at $10. This sounds bad for you, the company, but it’s kind of fine — you raised the money you wanted to raise. In the short term, it’s bad for your investors, who just lost a big chunk of change. My numbers here are made up, but the important thing is the spread: an IPO could pop 5% on first day, or 100%, or -80%. The difference there is volatility, which is what you have to pay a bank for — the risk that they lose money instead of popping. In times of increased volatility (hello 2020!), you’re gonna have to pay a lot. The bank is going to underprice your stock to try and get a bigger “pop”, which, remember, means you’re probably leaving some money on the table. A SPAC offers a compromise. “Negotiate with us instead, and avoid the pop (or the drop) entirely!” You reduce volatility in exchange for taking a private deal and potentially leaving some money on the table. It’s trading a bigger payday for a smaller risk, which looks pretty good right now. But in times of more financial normalcy, expect more IPOs. My understanding of SPACs vs. IPOs is based entirely on Matt Levine’s excellent Money Stuff column, btw — go check that out if you want to read stuff from someone who actually knows this stuff.
- formercoder 6y ago
  I believe SPAC targets might also have lower regulatory burdens not entirely sure.
  - ketzo 6y ago
    Oooo, that's interesting. I can imagine that's particularly an incentive for startups without robust legal teams.
- thekyle 6y ago
  I always imagined that companies that have their stock price "pop" after IPO would've been better off doing a DPO instead (like Spotify) since they would've gotten more money.
cortesoft 6y ago
Matt Levine has written a number of interesting articles about SPACs recently. In times of high volatility, they become more attractive.
tehabe 6y ago
I would prefer if companies would stay private much, much longer. The stock market is extremely irrational and believes almost every hype. Which makes a lot of IPOs overpriced in the first place.
- ralph84 6y ago
  Valuations that in hindsight end up being too optimistic aren't unique to public markets. WeWork didn't have to go public to be valued at $47 billion. In fact it was the act of trying to go public that brought the valuation back to reality.
  - tehabe 6y ago
    valuations of private companies are even more volatile than for "public" companies. in the case of WeWork it seems to me it was more like a scam of investors who fell for it. I stopped wondering when I read that some of the buildings were owned by the WeWork founders and leased by WeWork.
- zrail 6y ago
  The problem is that employees of these large private companies are working for somewhat below market wages in exchange for illiquid equity. If these companies stay private for a long time they either have to cash out equity or offer more cash compensation. Edit: option tender offers are absolutely a thing but I don’t think I’ve ever heard of an RSU tender offer.
  - tehabe 6y ago
    I think the issue is, that many don't even have a working business model and are despesrate to find one after they went public. Even though sometimes, there is simply no business model, no way to earn money with a service, no way to make a profit. And in such a situation a company should pay their employees in equity or take money from investors who essentially speculate for a good IPO to get their investment back.
  - user555555555 6y ago
jacques_chester 6y ago
For those wondering what the heck a SPAC is, this seems to be what it's about: https://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co... > A special purpose acquisition company (SPAC), sometimes called blank-check company, is a shell company that has no operations but plans to go public with the intention of acquiring or merging with a company with the proceeds of the SPAC's initial public offering (IPO). I'm still not entirely clear what the implications are.
- Spooky23 6y ago
  Sounds like another financial innovation to avoid transparency.
  - Jommi 6y ago
    It gets even worse when you talk about reverse mergers. For example the way some chinese companies have become listed in the US is just buying out a penny stock company and listing through that.
  - nordsieck 6y ago
    > Sounds like another financial innovation to avoid transparency. I guess it depends on whether you think the financial regulations around IPOs are mostly needless friction or necessary for the public good.
- dodobirdlord 6y ago
  It seems like the gist of it is that taking a startup public is a pain in the ass on account of regulatory complexity, so you just create a shell company with a charter that says that if it goes public with enough money it will buy your startup in a private transaction. Then you IPO your shell company, which is easy because it has no operations. If it raises enough money you sell your startup to it, and if not you return the money to the shareholders.
- kelnos 6y ago
  The to-be-acquired (aka to-be-brought-public) company only has to negotiate with a single counter-party -- the SPAC -- so it's less likely the deal will fall through. However, the SPAC is taking on more risk -- they are putting literally all of their money into the acquisition in order to effectively become the acquired company -- so the acquired company will probably have to accept a lower price. Would it be higher than the artificially deflated price in an IPO? Maybe, maybe not. In COVID times, maybe it would be higher. Even if it isn't, the risk of an IPO falling through right now is much higher than usual, so a company wanting to go public might be willing to raise less money in exchange for a higher likelihood of the deal working out.
necubi 6y ago
Matt Levine has been writing about this trend lately: * https://www.bloomberg.com/news/newsletters/2020-06-23/money-stuff-bill-ackman-wants-a-mature-unicorn https://www.bloomberg.com/news/newsletters/2020-06-23/money-... * https://www.bloomberg.com/opinion/articles/2020-07-14/everyone-wants-a-blank-check https://www.bloomberg.com/opinion/articles/2020-07-14/everyo... The gist is that an SPAC is less risky than an IPO for the company (you only have to negotiate with a single entity, and odds of an agreement falling through are much lower) but in return you're going to have to compensate the SPAC for taking on that risk by lowering the price. That tradeoff is more appealing in uncertain times than in good times.
- deleted 6y ago
  [deleted]
jshaqaw 6y ago
SPACs are a bull frenzy market phenonemom. The winners are the investment banks who collect insane fees between insurance and deal advisory. The other winners are sponsors who get the fattest fee payout in the financial ecosystem dwarfing hedge funds or private equity. Believe me investors are not the winners.
- cdolan 6y ago
  Dont sponsors also take on the highest risk?
  - jshaqaw 6y ago
    They do. If they don’t close a deal they are stuck with all the transaction costs. This leads to adverse selection of deals as a SPAC will always choose to do any deal over dissolving without a deal.
beervirus 6y ago
This question has it exactly backwards. SPACs cost the company more money than the IPO pop. With a SPAC you’re buying more certainty than the IPO gives you, and that doesn’t come for free.
joschmo 6y ago
As someone that's raised money for SPACs, been an advisor to SPACs and sold companies to SPACs, the answer is a resounding no. Most VC-backed companies, whether in tech or biotech, don't need the strategic shift that's core to a SPAC thesis. You usually get bought by a SPAC when you need new management to come in and kill darlings for long-term health, not as an option to go public. The folks that think it's a method to avoid day-one price pops are mostly incorrect. Price pops are intentional as selling 10% of your company at a discount fills up the IPO book much faster and causes 10x+ oversubscriptions. This signals strong demand to the majority of very large asset allocators who come in post-IPO. Those investors psychologically overvalue day-one pops years into the stock's public lifetime. I've had conversations with heads of tech investing at many $100bn+ funds who mention day-one pops when they enter a stock 5 years post-IPO. Doing the math, strong market confidence in your company pays dividends when you're selling the other 90%.
- ketzo 6y ago
  > The folks that think it's a method to avoid day-one price pops are mostly incorrect. Price pops are intentional as selling 10% of your company at a discount fills up the IPO book much faster and causes 10x+ oversubscriptions. Just because it's intentional doesn't mean companies can't still try to avoid it though, right? I'm still pretty uncertain in my knowledge around this, but isn't this actually still a good reason for a company to seek a SPAC deal?
  - Lazare 6y ago
    No. The "pop" is part of the cost of the IPO, but SPACs are more expensive than an IPO. If your thinking is "IPOs are good, but too expensive; what if there's a big pop I miss out on?", then you would never want to consider a SPAC. If your thinking is "IPOs are good and the pop is fine, but there's too much risk of the deal falling apart", then you might consider a SPAC instead.
    - ketzo 6y ago
      But that second part is what’s key these days, right? Reducing uncertainty seems big — as I understand it, with an IPO you don’t know exactly how much money you’ll raise until the literal end of day 1, whereas with a SPAC, the specific dollar amount your company raises is worked out through negotiation well in advance of “going public”. Thank you for the clarification on that first part, though.
foghornleghorn 6y ago
IPO's what?
- donarb 6y ago
  Exactly!
crote 6y ago
As someone who knows nothing about stocks: why aren't they just auctioned off? Start by selling the highest bidder the amount of stock they bid for, then continue with the next-highest bidder until the supply is depleted. Wouldn't that guarantee the best value for the company?
- necubi 6y ago
  That's more or less how a direct listing works. Historically direct listings have been rare, but recently Spotify and Slack have successfully done it. The main downsides (aside from it just being unusual and therefore a bit risky) is that for regulatory reasons the company can't sell new shares this way, so it's just a means to go public and doesn't raise any money. However, once the company is public (and has an established price) nothing is stopping them from doing a secondary offering.
  - WrtCdEvrydy 6y ago
    > regulatory reasons the company can't sell new shares this way So can only direct list for a followup, not for an initial? I'd love to issue 1 million shares and just sell them to the pending buy orders on a market.
    - chii 6y ago
      it'd be easy for the company to commit fraud by doing this. That's why it's disallowed. An IPO which is underwritten by sophisticated investors will be assumed to have done due diligence and thus, less likely to be an act of defraud. Hertz tried to sell more shares during their bankruptcy, and needed to ask the SEC for permission (to which the SEC is pretty much denied it).
  - hamandcheese 6y ago
    > is that for regulatory reasons the company can't sell new shares this way, so it's just a means to go public and doesn't raise any money. Doesn't the company own shares? I've always assumed that when I get paid stock options or RSUs, they are transferred from "the company". So I would assume that a company could sell shares as part of a direct listing in order to raise money? Otherwise why direct list?
crb002 6y ago
Seems less burdensome to find a large publicly traded company willing to invest with shares of their non-volatile stock. Say megacorp buys a 30% stake, then vested employees get a distribution of 30% of their vest as megacorp stock. You might call this IPO Lite. Benefits of market liquidity for all the shareholders and retain the limited dilution of an IPO.
Animats 6y ago
You can IPO via an auction. Google did.[1] That's useful when you have confidence the IPO will be oversubscribed, and don't really need underwriters. [1] https://www.cnet.com/news/google-files-for-unusual-2-7-billion-ipo/ https://www.cnet.com/news/google-files-for-unusual-2-7-billi...
Lazare 6y ago
A SPAC gives more certainty but less money. An IPO gives more money but less certainty. Most of the criticism of IPOs has been over their cost, and a SPAC is strictly worse. So...no. SPACs have been (and will continue to be) relatively popular in times of high volatility where their lower risk is worth their higher price, but in general, nobody is clamoring for an IPO replacement that gives even more money to financial intermediaries.
LatteLazy 6y ago
A better question is why this keeps happening? The only thing I can think is that most employees can't sell their stock on IPO day, they're locked in for months to years. So they don't care if the IPO is undervalued, they'll sell at the true value later on. But what about non employee investors? Why do they sign off on IPOs knowing the stats?

77 points by kaboro 6y ago

If the main dig against traditional IPOs is that they are miss priced I don't see how SPACs fix that. Two SPAC offerings in recent memory that I'm aware of, Virgin Galactic, and Nikola both had huge run ups soon after the mergers happened. This dynamic seems more likely to be a product of hype and limited available shares initially due to lockup periods.

ketzo 6y ago
But critically, the misprice is not what matters to the companies raising money. What matters to them is the amount of money they’re able to raise initially, and that can be higher in a SPAC deal. Or it could be lower! But it’s less volatile.
- deleted 6y ago
  [deleted]
- beervirus 6y ago
  But from first principles, it should basically always be lower.
  - ketzo 6y ago
    Yeah, but even if it's lower, the number is certain, decided on over the negotiating table. In an IPO, you don't know till the day of your IPO exactly how much you're going to raise.
    - dimes 6y ago
      When a company does an IPO, they hire an underwriter that guarantees that they'll sell a specific amount of stock at a specific price. So the company knows how much money they'll raise by the time the first day of trading arrives.

ketzo 6y ago

At least the way I understand it, SPACs offer a trade off, not an upgrade. The danger of an IPO (from the perspective of the company going public) is the “IPO Pop”: you offer your stock at $20, by the end of the first day it’s trading at $40, and you realize you left a bunch of money on the table. This is a benefit to the initial investors, who make a big profit day 1. The inverse risk is the opposite (see Lyft, Slack IPOs): you offer your stock at $20 and it ends the day trading at $10. This sounds bad for you, the company, but it’s kind of fine — you raised the money you wanted to raise. In the short term, it’s bad for your investors, who just lost a big chunk of change. My numbers here are made up, but the important thing is the spread: an IPO could pop 5% on first day, or 100%, or -80%. The difference there is volatility, which is what you have to pay a bank for — the risk that they lose money instead of popping. In times of increased volatility (hello 2020!), you’re gonna have to pay a lot. The bank is going to underprice your stock to try and get a bigger “pop”, which, remember, means you’re probably leaving some money on the table. A SPAC offers a compromise. “Negotiate with us instead, and avoid the pop (or the drop) entirely!” You reduce volatility in exchange for taking a private deal and potentially leaving some money on the table. It’s trading a bigger payday for a smaller risk, which looks pretty good right now. But in times of more financial normalcy, expect more IPOs. My understanding of SPACs vs. IPOs is based entirely on Matt Levine’s excellent Money Stuff column, btw — go check that out if you want to read stuff from someone who actually knows this stuff.

formercoder 6y ago
I believe SPAC targets might also have lower regulatory burdens not entirely sure.
- ketzo 6y ago
  Oooo, that's interesting. I can imagine that's particularly an incentive for startups without robust legal teams.
thekyle 6y ago
I always imagined that companies that have their stock price "pop" after IPO would've been better off doing a DPO instead (like Spotify) since they would've gotten more money.

cortesoft 6y ago

Matt Levine has written a number of interesting articles about SPACs recently. In times of high volatility, they become more attractive.

tehabe 6y ago

I would prefer if companies would stay private much, much longer. The stock market is extremely irrational and believes almost every hype. Which makes a lot of IPOs overpriced in the first place.

ralph84 6y ago
Valuations that in hindsight end up being too optimistic aren't unique to public markets. WeWork didn't have to go public to be valued at $47 billion. In fact it was the act of trying to go public that brought the valuation back to reality.
- tehabe 6y ago
  valuations of private companies are even more volatile than for "public" companies. in the case of WeWork it seems to me it was more like a scam of investors who fell for it. I stopped wondering when I read that some of the buildings were owned by the WeWork founders and leased by WeWork.
zrail 6y ago
The problem is that employees of these large private companies are working for somewhat below market wages in exchange for illiquid equity. If these companies stay private for a long time they either have to cash out equity or offer more cash compensation. Edit: option tender offers are absolutely a thing but I don’t think I’ve ever heard of an RSU tender offer.
- tehabe 6y ago
  I think the issue is, that many don't even have a working business model and are despesrate to find one after they went public. Even though sometimes, there is simply no business model, no way to earn money with a service, no way to make a profit. And in such a situation a company should pay their employees in equity or take money from investors who essentially speculate for a good IPO to get their investment back.
- user555555555 6y ago

jacques_chester 6y ago

For those wondering what the heck a SPAC is, this seems to be what it's about: https://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co... > A special purpose acquisition company (SPAC), sometimes called blank-check company, is a shell company that has no operations but plans to go public with the intention of acquiring or merging with a company with the proceeds of the SPAC's initial public offering (IPO). I'm still not entirely clear what the implications are.

Spooky23 6y ago
Sounds like another financial innovation to avoid transparency.
- Jommi 6y ago
  It gets even worse when you talk about reverse mergers. For example the way some chinese companies have become listed in the US is just buying out a penny stock company and listing through that.
- nordsieck 6y ago
  > Sounds like another financial innovation to avoid transparency. I guess it depends on whether you think the financial regulations around IPOs are mostly needless friction or necessary for the public good.
dodobirdlord 6y ago
It seems like the gist of it is that taking a startup public is a pain in the ass on account of regulatory complexity, so you just create a shell company with a charter that says that if it goes public with enough money it will buy your startup in a private transaction. Then you IPO your shell company, which is easy because it has no operations. If it raises enough money you sell your startup to it, and if not you return the money to the shareholders.
kelnos 6y ago
The to-be-acquired (aka to-be-brought-public) company only has to negotiate with a single counter-party -- the SPAC -- so it's less likely the deal will fall through. However, the SPAC is taking on more risk -- they are putting literally all of their money into the acquisition in order to effectively become the acquired company -- so the acquired company will probably have to accept a lower price. Would it be higher than the artificially deflated price in an IPO? Maybe, maybe not. In COVID times, maybe it would be higher. Even if it isn't, the risk of an IPO falling through right now is much higher than usual, so a company wanting to go public might be willing to raise less money in exchange for a higher likelihood of the deal working out.

necubi 6y ago

Matt Levine has been writing about this trend lately: * https://www.bloomberg.com/news/newsletters/2020-06-23/money-stuff-bill-ackman-wants-a-mature-unicorn https://www.bloomberg.com/news/newsletters/2020-06-23/money-... * https://www.bloomberg.com/opinion/articles/2020-07-14/everyone-wants-a-blank-check https://www.bloomberg.com/opinion/articles/2020-07-14/everyo... The gist is that an SPAC is less risky than an IPO for the company (you only have to negotiate with a single entity, and odds of an agreement falling through are much lower) but in return you're going to have to compensate the SPAC for taking on that risk by lowering the price. That tradeoff is more appealing in uncertain times than in good times.

deleted 6y ago
[deleted]

jshaqaw 6y ago

SPACs are a bull frenzy market phenonemom. The winners are the investment banks who collect insane fees between insurance and deal advisory. The other winners are sponsors who get the fattest fee payout in the financial ecosystem dwarfing hedge funds or private equity. Believe me investors are not the winners.

cdolan 6y ago
Dont sponsors also take on the highest risk?
- jshaqaw 6y ago
  They do. If they don’t close a deal they are stuck with all the transaction costs. This leads to adverse selection of deals as a SPAC will always choose to do any deal over dissolving without a deal.

beervirus 6y ago

This question has it exactly backwards. SPACs cost the company more money than the IPO pop. With a SPAC you’re buying more certainty than the IPO gives you, and that doesn’t come for free.

joschmo 6y ago

As someone that's raised money for SPACs, been an advisor to SPACs and sold companies to SPACs, the answer is a resounding no. Most VC-backed companies, whether in tech or biotech, don't need the strategic shift that's core to a SPAC thesis. You usually get bought by a SPAC when you need new management to come in and kill darlings for long-term health, not as an option to go public. The folks that think it's a method to avoid day-one price pops are mostly incorrect. Price pops are intentional as selling 10% of your company at a discount fills up the IPO book much faster and causes 10x+ oversubscriptions. This signals strong demand to the majority of very large asset allocators who come in post-IPO. Those investors psychologically overvalue day-one pops years into the stock's public lifetime. I've had conversations with heads of tech investing at many $100bn+ funds who mention day-one pops when they enter a stock 5 years post-IPO. Doing the math, strong market confidence in your company pays dividends when you're selling the other 90%.

ketzo 6y ago
> The folks that think it's a method to avoid day-one price pops are mostly incorrect. Price pops are intentional as selling 10% of your company at a discount fills up the IPO book much faster and causes 10x+ oversubscriptions. Just because it's intentional doesn't mean companies can't still try to avoid it though, right? I'm still pretty uncertain in my knowledge around this, but isn't this actually still a good reason for a company to seek a SPAC deal?
- Lazare 6y ago
  No. The "pop" is part of the cost of the IPO, but SPACs are more expensive than an IPO. If your thinking is "IPOs are good, but too expensive; what if there's a big pop I miss out on?", then you would never want to consider a SPAC. If your thinking is "IPOs are good and the pop is fine, but there's too much risk of the deal falling apart", then you might consider a SPAC instead.
  - ketzo 6y ago
    But that second part is what’s key these days, right? Reducing uncertainty seems big — as I understand it, with an IPO you don’t know exactly how much money you’ll raise until the literal end of day 1, whereas with a SPAC, the specific dollar amount your company raises is worked out through negotiation well in advance of “going public”. Thank you for the clarification on that first part, though.

foghornleghorn 6y ago

IPO's what?

donarb 6y ago
Exactly!

crote 6y ago

As someone who knows nothing about stocks: why aren't they just auctioned off? Start by selling the highest bidder the amount of stock they bid for, then continue with the next-highest bidder until the supply is depleted. Wouldn't that guarantee the best value for the company?

necubi 6y ago
That's more or less how a direct listing works. Historically direct listings have been rare, but recently Spotify and Slack have successfully done it. The main downsides (aside from it just being unusual and therefore a bit risky) is that for regulatory reasons the company can't sell new shares this way, so it's just a means to go public and doesn't raise any money. However, once the company is public (and has an established price) nothing is stopping them from doing a secondary offering.
- WrtCdEvrydy 6y ago
  > regulatory reasons the company can't sell new shares this way So can only direct list for a followup, not for an initial? I'd love to issue 1 million shares and just sell them to the pending buy orders on a market.
  - chii 6y ago
    it'd be easy for the company to commit fraud by doing this. That's why it's disallowed. An IPO which is underwritten by sophisticated investors will be assumed to have done due diligence and thus, less likely to be an act of defraud. Hertz tried to sell more shares during their bankruptcy, and needed to ask the SEC for permission (to which the SEC is pretty much denied it).
- hamandcheese 6y ago
  > is that for regulatory reasons the company can't sell new shares this way, so it's just a means to go public and doesn't raise any money. Doesn't the company own shares? I've always assumed that when I get paid stock options or RSUs, they are transferred from "the company". So I would assume that a company could sell shares as part of a direct listing in order to raise money? Otherwise why direct list?

crb002 6y ago

Seems less burdensome to find a large publicly traded company willing to invest with shares of their non-volatile stock. Say megacorp buys a 30% stake, then vested employees get a distribution of 30% of their vest as megacorp stock. You might call this IPO Lite. Benefits of market liquidity for all the shareholders and retain the limited dilution of an IPO.

Animats 6y ago

You can IPO via an auction. Google did.[1] That's useful when you have confidence the IPO will be oversubscribed, and don't really need underwriters. [1] https://www.cnet.com/news/google-files-for-unusual-2-7-billion-ipo/ https://www.cnet.com/news/google-files-for-unusual-2-7-billi...

Lazare 6y ago

A SPAC gives more certainty but less money. An IPO gives more money but less certainty. Most of the criticism of IPOs has been over their cost, and a SPAC is strictly worse. So...no. SPACs have been (and will continue to be) relatively popular in times of high volatility where their lower risk is worth their higher price, but in general, nobody is clamoring for an IPO replacement that gives even more money to financial intermediaries.

LatteLazy 6y ago

A better question is why this keeps happening? The only thing I can think is that most employees can't sell their stock on IPO day, they're locked in for months to years. So they don't care if the IPO is undervalued, they'll sell at the true value later on. But what about non employee investors? Why do they sign off on IPOs knowing the stats?