SPACs (Special Purpose Acquisition Corps) are all the rage now. I write a lot of articles online about these blank check vehicles. This article will pass on some of the techniques I use to analyze these stocks. It will show three easy ways to value the SPAC stock and help you pick the right one. At the end of the article, there are 5 examples of recent SPAC stock deals I have analyzed and written about using these methods.
This is the cardinal rule in blank check investing. There are a ton of SPAC stocks out there right now. Spacinsider.com reports that there are now 546 blank check stocks out there. How in the world are you going to pick the right one, if at all? The answer is to only buy those that have announced a clear merger target.
The reason for this is clear. Only a little over half of the SPACs out there will end up picking a target private company with which they will merge. The way this works is that the SPAC usually has 24 months from the date of their IPO to actually close a deal. Sometimes there are extensions. If they can’t find a willing target the SPAC is liquidated and the money returned to investors, with interest. There are three reasons why announced merger deals are likely to close.
First, private companies are keen to do the deal. Keep in mind that the competition for private companies that are large enough and ready to be public is limited. There are now many more SPACs willing to interest them. One advantage to private companies in doing a SPAC deal is that they can get paid cash for some of their existing shares. In addition, their company and board will usually end up in control of the merged public company.
Contrast this with IPOs. In IPO transactions, this is generally frowned upon. The investment banks leading a tech company to the public markets dissuade insiders from taking any of the IPO proceeds. But in SPAC mergers, this can be buried in the details of the transaction details. Investors tend to not notice this.
This is one reason why SPAC deals are much more attractive to private companies. There are other reasons, such as the certainty of the cash amount to be received in a SPAC rather than an IPO. This can allow them to get started on producing their goods or technology either with a bridge loan or drawing their resources with more conviction.
The next reason why SPAC mergers tend are more certain to close relates to the private deal makers that sponsor the original SPACs. They get to own large portions of the final SPAC target company for no money down. They form a SPAC with no cost, take it public, and then complete a reverse merger. As result, these sponsors end up with a 3 to 5% stake in the public without having to invest any money. This is a major reason why Wall Street firms are turning to sponsor SPACs instead of IPOs. With IPOs, broker-dealers have a “greenshoe” option to buy in at the IPO price, but this is still a capital outlay.
The third reason is that SPAC mergers tend to close is because often, if not close to always, a hedge fund invests in the deal. They commit to buying into the SPAC at the original SPAC IPO price, not the existing market price. These investments, known as PIPE deals (private investments in public equities) have an implied almost guaranteed profit.
For example, if the hedge fund commits to putting up $100 million to $200 million in PIPE money for an announced deal, the hedge fund can short the public stock price immediately. This locks in an arbitrage profit, as most PIPE deals close within 3 to 6 months. Often this can be done with swap arrangements, so the public price is not affected. So they are highly motivated to get the deal done. This also helps motivate the private company since they get to control the PIPE money invested in the reverse merger after the deal closes.
The bottom line is that SPACs with merger deals are highly likely to be closed. The motivations of the private companies, sponsors, and PIPE funds are all aligned to get the deal done. The public market owners generally only control 20% or so of the final capitalization. So their votes are almost irrelevant.