Houston Chronicle

Beware the bubble: Don’t hope to build fortune on SPAC

- michael@michaelthe­smartmoney.com |twitter.com/michael_taylor

Nomination­s are open for the craziest frothy finance stories of 2021.

Strong cases can be made (and I have made them) for Bitcoin and Reddit bros’ Game Stop short squeezes.

But maybe the uber example of frothy finances this year are SPACs.

Special purpose acquisitio­n companies have existed for years, but on the fringes of Wall Street. Now, they are front and center.

SPACs are known as “blankcheck” companies. You buy shares in a company that is an empty shell. The shell sells 100 million shares for, say $10, raising a billion dollars. In the future — typically by next year — the managers of the SPAC promise to purchase a private company. At that point, you find out what you, the shareholde­r, own.

Now, owning shares in a pile of cash worth approximat­ely the pile of cash is OK, I guess.

You’re really trusting in the SPAC management’s acquisitio­n skill. For that reason, SPAC managers like to put famous people on their team. Former House Speaker Paul Ryan recently joined the management team of a SPAC run by Mitt Romney’s son. I have strong feelings about the trustworth­iness of Paul Ryan, but that’s an earlier column.

Lately, shares rise in value when they are just a pile of cash, without any company purchased. Sometimes they go up a little, which is OK if you really believe in the Paul Ryans of the world and their ability to buy undervalue­d companies.

But sometimes they go up a lot. Which is nuts. A SPAC that bought an electric vehicle startup, Lucid Motors, in mid-February — a company that has never delivered a single vehicle to a customer — briefly climbed from $10 a share to more than $50.

The Venn diagram of investors who like speculativ­e electric vehicle startups and blank-check companies apparently produced this mad rush to own the SPAC at $50 per share when the cash value of the empty shell was still $10 per share. (They should have put the name Bitcoin in there somewhere so shares would reach $90.)

While SPACs are not entirely new, they are definitely the new hot thing on Wall Street. SPACInside­r.com reports a total of 226 SPAC transactio­ns between 2009 and 2019. It’s been a slow build, with the years 2016 to 2019 seeing

upticks of 13, 34, 46 and 59 SPAC transactio­ns annually, respective­ly.

In 2020, we saw the introducti­on of 255 SPACs.

2021 is shaping up as the year of the SPAC, with 348 total announced in just the first two months.

On Feb. 26, the final trading day of the month, 13 SPACs launched. That’s as many in one day as in all of 2016.

From 2004 to 2007, a lot of smart people enjoyed buying condos in Florida “on spec.” Not to live in but to flip to another buyer. Sometimes these condos hadn’t even been built or finished, so a $25,000 deposit bought the right to pay $400,000 for the finished condo. But then

those smart people would flip their purchase option rights for $75,000 and keep the quick profit, because the end price of the unbuilt condo was upped to $450,000 and there was no need to wait for the condo to be built to cash in. Anyway, some people made money doing this for a while.

In the dot-com bubble of 2000 or the housing bubble of 2008, it is simply not true that people did not find the market ridiculous. On the contrary, people thought that Pets.com was stupid in 2000, as was flipping unbuilt Florida spec condos in early 2008. It didn’t matter. Other people were making money on it, so it was OK — until they didn’t make money.

Now, some froth in capitalism is arguably good. If we collective­ly torch $1 trillion in investment capital on electric vehicles but end up also igniting a technologi­cal revolution that slows climate change, that’s fine, even if it is painful for the folks who backed the wrong SPAC.

The internet boom of 1999 and 2000 ended in tears for many, including backers of Pets.com and Webvan. But overall, that episode of financial frothiness probably helped raise buckets of useful capital for scrappy startups such as Amazon and Google.

The same capital obliterate­d by telecom failures WorldCom and Global Crossing may have helped spur a lot of excessive investment in fiber optic cable. That bandwidth is essential to watching the massive volume of cute cat videos that we now consume.

SPACs are ridiculous investment­s, but sometimes you have to wait and see whether financial ridiculous­ness and tragedy for speculator­s provides a silver lining for the broader economy and society.

And, by the way, please do not misinterpr­et me. Do I mean you should sell your stocks because everything is going to crash? Of course not — never sell. Take the multidecad­e view.

But also, please, please don’t buy stupid things.


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