Qwick Takes: SPAC rush faces skepticism
This week, TalkingBizNews Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about the growing popularity of special-purpose acquisition companies that startups use to list on the stock market faster and more easily. Check out some of the top commentary:
Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University:
Often referred to as “blank check companies,” SPACs have no commercial operations and are formed strictly to raise capital. At the time of their initial public offering, SPACs do not even make their potential acquisition targets to avoid extensive disclosures during the IPO process. In layman’s terms, the investors in a SPAC have no idea what company they ultimately will be invested in. By definition, one should realize what a risky endeavor SPACs are.
Bam Azizi, co-founder and CEO at Front:
Investors should always screen the operators and companies in SPACs before investing. SPACs have attracted a flood of both novice and momentum investor money, which could artificially prop up the valuation. There’s reason to worry about a bubble nearly everywhere, but there’s still profit to be had with the right SPACs. It’s not a given, though, and the increasing number of SPACs demand more due diligence than ever.
Vijay Sundaram, Chief Strategy Officer at ManageEngine:
Companies that might not be able to access the capital markets via traditional methods are increasingly doing so via SPACs. We’re seeing some early-stage companies going public with little to no revenue, and unrealistic revenue projections. Not all of these SPACs’ targeted acquisition companies are ready for the capital markets. SPAC sponsors are incentivized to close deals—even if they overpay or decide to take a chance on a fledgling company. If SPAC sponsors are unable to find a suitable company to acquire (generally within two years), they have to return the investors’ money, which results in sponsors losing all of the IPO expenses they’ve incurred. Put simply, the SPAC structure keeps sponsors motivated to close a deal, even when the acquisitions they make aren’t necessarily ready to go public.
Pradeep Khurana, Managing Director at ContinuServe:
The stock market has been hot and SPACs have been perhaps the hottest part of the market, so, yes, there is a strong possibility of overvaluation. The very nature of SPACs and the incentives for the SPAC promoters to get a deal done creates a highly conducive hype environment that will inevitably create some froth. So there is likely to be a reckoning for SPACs where bearish bets will pay off. However, timing is everything. Can SPACs still go higher before they come down? Absolutely.