The Great SPAC Scam: Why SPACs Are Terrible for Most Investors

In this tutorial, you’ll learn why SPACs (Special Purpose Acquisition Companies) are a scam, and how the process of going public via a SPAC differs from the process of a traditional IPO (initial public offering).

Resources:

https://youtube-breakingintowallstreet-com.s3.amazonaws.com/107-24-SPAC-Scam-Slides.pdf

https://youtube-breakingintowallstreet-com.s3.amazonaws.com/107-24-SPAC-Model.xlsx

Table of Contents

3:23 Part 1: The SPAC Process and Mechanics

9:04 Part 2: SPAC “IPO Model” (Step 1)

15:21 Part 3: SPAC “Merger Model” (Step 2)

18:23 Part 4: SPAC vs. Traditional IPO Models

22:28 Part 5: SPAC Performance So Far

23:54 Part 6: SPACs vs. Private Equity and Hedge Funds

25:06 Recap and Summary

Lesson Outline:

Recently, SPACs (Special Purpose Acquisition Companies) have been all the rage, with celebrities from Shaquille O’Neal to Paul Ryan to A-Rod to Colin Kaepernick raising their own funds.

SPACs are often pitched to private companies as a way to go public more quickly, with less regulation and lower fees.

But the truth is that SPACs mostly benefit the wealthy celebrities and investors that start them because they receive huge chunks of actual, legitimate businesses in exchange for doing almost nothing.

If you buy SPAC shares as an investor, you’re buying a completely empty company worth nothing and betting that the celebrity in charge will find a valuable acquisition target and turn your money into something useful.

SPAC Process and Mechanics

It’s best to think of SPACs with a 2-step process: the initial public offering (IPO) for the SPAC itself, and then the SPAC’s reverse merger with a private company to take it public (if that ever happens).

In Step 1, the “Sponsor” forms a SPAC and purchases warrants to cover underwriting fees and other expenses associated with the IPO.

Then, this Sponsor gets a “Promote” for 20% of the company’s equity for a “nominal investment” (e.g., $25,000).

The SPAC then goes public and sells units, shares, and warrants to public-markets investors.

The gross proceeds from the IPO are kept “in trust” until the SPAC finds a real company to acquire. If it does not find one within 18-24 months, it will dissolve.

In Step 2 – the reverse merger – the SPAC identifies a target company and negotiates an acquisition where the company becomes the majority owner.

The SPAC shareholders get to “vote” on this deal, and if they don’t like it, they can redeem their shares… in theory (if there are actual buyers for these shares).

If the deal is approved, the target company merges into the SPAC and becomes public, and the cash pays for the target, repays debt, or is kept on the Balance Sheet.

Also, another investor might put money into the post-merger SPAC via a private investment in public equity (PIPE), so its cash balance increases.

SPACs are a racket because of the “Founder Promote,” which somehow grants the Sponsor 20% of the SPAC’s equity – even though they’ve contributed almost no capital.

SPAC Models vs. IPO Models

In a typical SPAC deal, the entity might raise $200 million by selling 20 million shares for $10.00 each in the IPO, and the Sponsor gets 20% as a “Promote.”

The Sponsor might also buy approximately 4 million warrants for $1.00 – $1.50 per warrant at an $11.50 strike price. These proceeds pay for the IPO underwriting fees, which are paid for upfront in the IPO and deferred, upon completion of the reverse merger, usually for 5-6% total.

When this SPAC finds a promising private company, it might acquire it for a Purchase Enterprise Value of $2 billion and Purchase Equity Value of $1.6 billion, also recruiting other investors for a $100 million PIPE.

In this scenario, the SPAC can use $300 million of cash to purchase the private target, and it has to issue shares for the remaining $1.3 billion.

Because of all the investor groups, though, the total value to existing shareholders is around $1.533 billion, and the target company ends up owning around ~79% of the company before any exercise of the warrants.

In an IPO, by contrast, the company still raises $300 million of cash, but the total value to existing shareholders is more like $1.582 billion, and the company owns ~81%.

Although SPACs promise lower fees, they are actually about the same as the standard 6-7% IPO underwriting fee if you factor in both the upfront and deferred underwriting fees, the M&A fees in the reverse merger, and the fees associated with the PIPE investment.

Видео The Great SPAC Scam: Why SPACs Are Terrible for Most Investors канала Mergers & Inquisitions / Breaking Into Wall Street