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The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

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Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#11

Post by neilarmstonk »

cl42 wrote: post #4

For those investing in public equities: I personally believe some SPACs are definitely worth it in the long run. SPACs suffering on the public markets are a great opportunity to make long-term investments if you are very, very careful and wait a bit longer than most to jump into the right companies. From my experience, the strategic part is to wait until warrants expire. Most SPACs have very, very positive investor p…

Perhaps overly cynical but my take is that there’s little relationship between fundamentals and valuations of “exciting” public companies at the moment, and so acting on any grand theory about underlying value is acting in the face of an unfortunate reality: you could be right… and still lose money.

You can find example after example of company that is either vastly overvalued, or vastly undervalued, according to any reasonable measure. I have no confidence that I can effectively predict the stock price of one of these companies, and SPACs fit squarely into that category. If I was looking for high-risk high-reward, I’d rather take riskier bets on known quantities.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#12

Post by Glyptodon »

Why isn't there a race to the bottom to shrink the sponsor cut from 20% to 5% or something? If being the sponsor is as protected and lucrative as suggested surely plenty of people would be willing to sponsor for less of a cut, which in turn would make the deal less of a bad deal for others?

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#13

Post by fennecfoxen »

rexreed wrote: post #3
Animats wrote: post #2

Right. You pay 20% of the company's value to avoid some legal fees and SEC scrutiny. And then there's an average net loss for investors.

What am I missing? Other than the sponsors, what are people getting out of it? Going "public" and selling shares on the public market without having to disclose anything first? This feels so bubble.

In the typical structure of a blank-check SPAC, if you don't like the company they pick to acquire, you're supposed to be able to get your money back before the deal closes. I'd guess that the option isn't exercised all that often in practice, though.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#14

Post by lmm »

Glyptodon wrote: post #12

Why isn't there a race to the bottom to shrink the sponsor cut from 20% to 5% or something? If being the sponsor is as protected and lucrative as suggested surely plenty of people would be willing to sponsor for less of a cut, which in turn would make the deal less of a bad deal for others?

Every deal is different, 80% of a share in a good company is worth a lot more than 95% of a share in a bad company. If it's an extremely marginal case then the sponsor shrinking their cut might be the difference between the retail investors pulling out or not, so in that case you might see it happen, but most of the time negotiating the acquisition and the PiPE is the hard part, and if you succeed at that then the deal is going to happen.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#15

Post by lmm »

rexreed wrote: post #3
Animats wrote: post #2

Right. You pay 20% of the company's value to avoid some legal fees and SEC scrutiny. And then there's an average net loss for investors.

What am I missing? Other than the sponsors, what are people getting out of it? Going "public" and selling shares on the public market without having to disclose anything first? This feels so bubble.

It doesn't seem much worse than buying on the first day of an IPO, when the well-connected investors have already bought their shares at the IPO price and enjoyed a "pop" to the price they're selling to you at.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#19

Post by vmception »

From my adventures in finance, I notice that nobody really understand what the experience is like for the issuer.

All the perspectives are about the secondary market.

SPACs: great for issuers

Crypto: great for issuers

NFTs: great for issuers

IPOs: great for issuers

Direct Listings: decent for issuers

Bonds: AMAZING for issuers

Be an issuer. Concepts become a lot more obvious alot faster when you think "what do the issuers get out of this" and dive and dig to find out the answer. If you're reading Matt Levine's digestible breakdown, it's too late.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#20

Post by rexreed »

lmm wrote: post #14
Glyptodon wrote: post #12

Why isn't there a race to the bottom to shrink the sponsor cut from 20% to 5% or something? If being the sponsor is as protected and lucrative as suggested surely plenty of people would be willing to sponsor for less of a cut, which in turn would make the deal less of a bad deal for others?

Every deal is different, 80% of a share in a good company is worth a lot more than 95% of a share in a bad company. If it's an extremely marginal case then the sponsor shrinking their cut might be the difference between the retail investors pulling out or not, so in that case you might see it happen, but most of the time negotiating the acquisition and the PiPE is the hard part, and if you succeed at that then the de…

What defines "good" and "bad"? From the market perspective "good" would be defined by its medium to long-term return to the investor that holds for a long enough period to cover the short-term loss. Whereas "bad" would be an acquisition that has declining value over time, even if its short-term performance is acceptable.
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