View profile

SPAC Attack!

SPAC Attack!
It’s all over for SPACs. The SEC and David Einhorn both say so. Run for the hills!!! Well, maybe. We walk you through why SPACs are looking so, like, 2020 right now, and whether it is indeed The End for this particular form of speculation.

DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
What Actually Is A SPAC Anyway
Since everyone has been loading the Super Duty with SPAC stocks and warrants and units of late, it stands to reason that everyone fully understands what SPACs and warrants and units are. Right? Indeed, most likely you are a SPAC expert. But because we want you to share this newsletter on Twitter, Facebook, MySpace, Compuserve Bulletin Boards, Multi User Dungeons, wherever - we’ll lay out some basics so that in sharing this post, you can feel the warm glow of helping to educate your fellow travelers.
SPAC, as everyone knows, is an acronym for Special Purpose Acquisition Company. The clue is in the title. A SPAC is a company formed for the sole purpose of going hunting for big game. It is in effect a big brown bag stuffed with money, and promises of more money, to big up the SPAC sponsor - the folks running the SPAC - in the eyes of its quarry. If you choose to buy securities in a SPAC before you know what the likely acquisition is, you’re in essence just backing the judgment of the sponsor. Nothing wrong with that. If you buy securities in ETFs or mutual funds or any other kind of large bag of money, you’re doing the same thing - backing the fund manager. Even if you buy the big dogs, SPY or QQQ, you are backing the manager to accurately track the indices - the S&P500 and Nasdaq respectively - that they say they are going to track. The identity of the fund manager, and whether they’re on a hot streak or not, matters. Just ask everyone’s favorite Millionaire Maker, Stock Mommy.
So, you have a SPAC in mind, a bunch of money-people (with industry-people as sidekicks, if you’re lucky) who spend their days dialing for dollars, as in, finding some jackpot winners to whom to give those dollars. Sorry, not give those dollars, we meant, of course, invest those dollars by way of, what is it again, oh yes, partnering with Exciting Company X. All good.
For the last couple years SPAC securities have followed a broad pattern, but the devil, as always, is in the detail. Typically, public market participants who don’t have gabillions under management can buy three different types of security in the SPAC. The stock, which is common equity; warrants, which are the right to buy the stock at price X before date Y; and the unit, which is usually one share and some fraction of a warrant. In time, the units are split into their constituent parts and trade accordingly.
Once the SPAC is formed and trading on your friendly neighborhood exchange, the SPAC sponsor usually has a fixed period of time within which to conclude an acquisition or investment in a hitherto privately owned, non-traded business. Once they find that target and agree it with the target’s board of directors and shareholders, the SPAC files a ‘merger agreement’ with the SEC detailing the terms thereof. So far so small print. They also tend to file a very bright shiny object called an investor presentation. This tends to have large sized fonts, numbers and charts which go from very small to very big, always from left to right. And usually some stuff about changing the world one grommet at a time, or whatever. If you’re thinking of investing in that SPAC, you should definitely read the investor presentation. You need to. But then read the doubleplusboring small print in the merger agreement or, if you can’t be bothered to, consider paying a securities lawyer to do so and explain it to you. Because in the small print be the stuff that the SEC is getting all hot under the collar about right now. We’ll come to that in a moment.
If you now own securities in a SPAC which has announced its planned merger (it’s called a merger because the two separate companies, the SPAC and its target, combine as one and then trade under a single ticker, usually based on the name of the target), it can be months before the merger completes, and it may not complete at all. Then, if it does complete, never forget that you bought securities in a thing that was going to invest in or acquire another thing. So even if your handle is @BarkingDog and you be the next underground hero of retail investing, putting your gabillions to work for the people and in so doing have selflessly come to own 10% of the SPAC … you don’t own 10% of the combined new company. You own less. Usually, but not always, a lot less.
SPACs are speculative creations. Nothing wrong with that. You just have to know it when you consider buying into one of them. You are speculating on (a) the skill and luck of the SPAC sponsor, (b) their ability to raise proper money from institutional money which will fund the actual investment or acquisition they make, © their successful selection, valuation, due diligence and completion of the acquisition or investment and (d) the subsequent performance of the underlying company both IRL and in the Land Of Make Believe aka the stock market, two dimensions of existence which as we all know are entirely orthogonal to one another. In short: this isn’t Ma Bell you are buying here.
So What's Up With The SEC And That Short Shorts Guy?
It’s fair to say that the last few years have not been characterized by extreme new levels of securities regulation or indeed particular levels of application of such regulations as already exist. One of the reasons everything has been moving up and to the right is that the market is a veritable box of chocolates for rich people. With the new Administration comes a new regulatory orthodoxy and its particular choice of deity is the former Goldmanite Gary Gensler, the new SEC Chair. Prior Dodd-Frank chops in mind, you can expect him to make a lot of noise about market reform, some of which will probably happen, too. Now, when a former Goldman Sachs guy and a famed short-seller (yes, David Einhorn, for it is he!) are getting all bromance-y about how to fix the market to make it better for the people, you have to wonder when did the world get turned upside down. No matter. The SEC has SPACs in their sights somewhat. Correctly they see the possibility for monkey business in that mix of speculative securities, complex structure and unknown, unknowable acquisition targets. In answer to the question, what could possibly go wrong with SPACs, the SEC’s not-wrong answer is, er, quite a lot.
The thread that Gensler’s gang is pulling on first is whether the warrants over SPAC stock are actually equity-like (ie. pure risk instruments) or whether they have any debt-like (ie. fixed value) to them. The answer will be deep in the wording of each of SPAC’s securities documents. They are all different. They look alike, but aren’t. Now, if debt-like, those warrants or part thereof might have to be declared on the balance sheet of the SPAC. Which in the imaginary Dreamtime of antiquity when stock prices depended on balance sheets (they never did, but let’s pretend for a moment), would depress the value of the stock, which would depress the value of the warrant, which would depress the value of the debt on the balance sheet, which would increase the value of the stock, which would increase the value of the warr…. OMG we have a headache already. (Now you see why classical mechanics isn’t a good paradigm in which to understand stock prices. At best we have some quantum logic going on here. Certain the SEC is capable of our most favorite Ensteinian concept, spooky action at a distance).
This is quite a nerdy thing for the SEC to be picking on. We could probably find a whole lot more obvious monkey business among SPACs if we went looking. (If that’s your thing, Muddy Waters and disciples should be your first port of call). So we assume the SEC has a particular SPAC or other in mind and has picked a headachey topic on which to go after them. We shall see. Being number nerds and secret balance sheet obsessives, we’re pretty interested in the outcome actually. So we’ll be following it closely.
Is The SPAC Party Over?
So, is it The End Of Days for SPACs? We think probably not. But we think folks are going to have to pay close attention to detail here and there’s every chance some existing SPACs get hit in some way.
We own a bunch of space-sector SPACs (most of which have yet to complete the mergers) in staff personal accounts, some stocks, some units, some warrants, but in each case we’ve always treated these things as certainly a little less risky than Space Doge Token but quite a lot more risky than our Microsoft holdings. So we own non-wealth-threatening allocations of the things. Some of them are down hard on the SEC attention and might be presenting tasty buying opportunities right now - but it’s hard to say without knowing more about the SEC’s direction of travel. Our own approach is to sit tight with the securities salad that we own, see what happens. Goes to zero? C'est la vie. Doubles? We’ll buy a burger. You want to be a hero, we salute you, and look forward to your tales from the front line.
In the meantime, we have just one thing to ask of you, which is, if you’re so minded, please share our newsletter across the social platforms of your choice. The buttons to do so are right here on this page. Thanks for reading our work!
Cestrian Capital Research, Inc - 16 April 2021
Afterword: An Apology
In our most recent Cestrian Stocks Bulletin episode, The Queen Is Dead, the version emailed to subscribers included some repeat wording that escaped our final QA process (we’ve fired the bot responsible). We corrected the online version that you can read on the web, but the Revue system doesn’t appear to permit amended versions to be sent out by email. What can we say. We let you down. We let our families down. But most of all, we let ourselves down. We have hired a new more diligent QA bot, fed it some code soup, and will try harder next time.
Disclosure - Cestrian Capital Research, Inc staff personal account(s) hold long position(s) in MSFT.
Did you enjoy this issue?
Become a member for $9 per month
Don’t miss out on the other issues by Cestrian Capital Research, Inc
Cestrian Capital Research, Inc

Proprietary buyside stocks research. Space and Cloud Focus. For US investors only.

You can manage your subscription here
If you were forwarded this newsletter and you like it, you can subscribe here.
Powered by Revue
5000 Birch St, West Tower, Ste 3000, Newport Beach, CA 92660