(Bloomberg) -- Even in this market, where speculative zeal has never been in short supply, the blind faith being bestowed on companies that go public by merging with blank-check companies stands out.
It started with big rallies in companies like Virgin Galactic Holdings (NYSE:SPCE) Inc., and DraftKings (NASDAQ:DKNG) Inc., which listed on exchanges not via initial public offerings but through mergers with special purpose acquisition companies, or SPACs. They promptly doubled, paving the way for gains in lesser-known firms like Hall of Fame Resort & Entertainment Co., BurgerFi International, Tattooed Chef and UCommune. They are, respectively, an owner of a resort in development near the Pro Football Hall of Fame, a fast-casual burger chain, a plant-based food upstart and the We Co. of China.
This year, more than 45 SPACs have gone public in the U.S. and more are on the way. The debuts have raised more than $13.5 billion, topping last year’s haul and marking an all-time high, according to data compiled by Bloomberg. As others come, attracting retail investors with their growth potential, market observers wonder if the enthusiasm will end in tears.
“If SPACs are the new IPOs and direct-listings, eventually the market and the people behind them will put out enough supply to swamp demand -- seems a bit frothy,” says StockTwits co-founder Howard Lindzon, who briefly tweeted under the moniker “Frothy” and “SPAC SPAC SPAC.”
Unfamiliar names, including a SPAC with the ticker SPAQ, started popping onto Lindzon’s radar over the last few weeks as they surfaced on Reddit, Stocktwits and Robinhood Financial. Apple Inc (NASDAQ:AAPL). and Tesla (NASDAQ:TSLA) Inc. were the more typical fodder on those platforms, according to Lindzon, but along came DraftKings, Nikola Corp. and Spartan Energy Acquisition Corp. -- the company behind the SPAQ ticker. There was “massive speculation” in terms of sentiment, he said.
After Virgin Galactic gained as much as 255%, and DraftKings added 149%, more SPACs, companies and investors wanted in. Deals on the horizon have pushed shares of SPACs higher, with Graf Industrial Corp. gaining 85% and Spartan Energy adding 45% before reaching peaks, as respective deals with Ford Motor-backed Velodyne Lidar Inc. and Fisker Inc. came to light. In the past week, Fortress Value Acquisition Corp. rose 35% on its intent to merge with rare-metals miner MP Materials, which touted its adjacency to electric vehicle production. In the health-care space, Immunovant (NASDAQ:IMVT) Inc. jumped 105% and AdaptHealth (NASDAQ:AHCO) Corp. surged 126% following deals last year before hitting their peaks in June.
Since the SPAC model embraces big and small businesses in disparate industries, it’s tough to generalize about them, and each should be judged individually, industry professionals say. “We are seeing SPAC deals of all sizes and shapes being announced and discussed. These range from earlier stage high-growth concept stocks to very large and mature companies with market values in excess of $10 billion,” Credit Suisse (SIX:CSGN) SPAC expert Niron Stabinsky said.
Meanwhile, the number of SPAC shells looking for an existing company to merge with keeps growing. They are sponsored by a who’s who of investment industry names, including Chamath Palihapitiya, Bill Foley, Barry Sternlicht, Bill Ackman, and most recently, Ron Burkle. Some speculative bidding tends to show up in SPACs even before they pick a target. Ackman’s Pershing Square Tontine Holdings Ltd. is the latest example, rising nearly 9% as shares started trading Wednesday, presumably on the hopes it will find something big to buy -- a mature unicorn, in Ackman’s parlance. As of now, no such deal has been detailed.
Behavioral Shift
The penchant for electric- and autonomous-vehicle companies has become a microcosm of the larger trend: Risk capital rushing to meet the demand of new investors who have left a mark on thinly traded small-company shares.
Investors are rewarding flexibility and bypassing what they perceive as the establishment, New York University Stern School of Business professor Aswath Damodaran said of the “delirium” in EV valuations amid a hunt for the next Tesla. The idea that upstarts will overtake more mature businesses is a persuasive one with today’s retail investor, many of whom believe the Covid-19 pandemic will accelerate the decline of old-line companies, he said.
Lindzon describes a similar behavioral shift: “Kids don’t give a rat’s ass about the S&P, they want to know what’s in the bag. They don’t want hospitality-, or land-based. They want the cloud. They don’t want conglomerates, they want simple businesses they can understand.”
SPAC-Rich
For companies seeking a public debut, SPACs present a less costly, less scrutinized and speedier path to public markets than IPOs. As venture-capitalist Bill Gurley tweeted earlier this month, the rise of the SPAC has much to do with the relative cost of capital.
A SPAC is essentially a shell company that raises money on public exchanges on the promise it can locate an attractive private company and merge with it. It often takes as long as two years to pull off -- to find, evaluate, negotiate and consummate a merger -- although at least one inked a deal just months after going public. The set-up also offers a fixed price for entry to the public market, a compelling alternative to the IPO process that could result in a range of outcomes, including being underpriced.
A company can also tell a story about its future after a deal is announced, forecasting growth one to four years out. And the big brand names often involved in SPAC mergers are catching attention from the retail set, which thanks to platforms like Robinhood, includes novice, often young, investors.
“I’m super bullish on kids learning, but there are hard lessons to be learned ahead,” Lindzon said.
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