The Side Benefit of SPACs for Bill Ackman and Jeff Smith: Gaining Information on Private Companies in the Time of Covid

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Special Purpose Acquisition Companies can be a wonderful tool in the right hands. Most folks know them as acquisition vehicles used by Sponsors to raise capital in a blank check company from shareholders via a public offering. That capital is then used to acquire a target operating company. So, you can think of them as sort of the love child of the capital markets and M&A in the form of a two-step transaction (first public offering, then M&A).  Unfortunately for SPACs, they have a bad reputation due to perverse incentives (like the strange way sponsors can benefit to the detriment of shareholders when the trading price of the de-SPAC’d company drops[1]), and a penchant (allegedly) for lackadaisical management and bad acquisitions.  

But never fear SPACS, 2020 is here! In 2020 the list of SPACs is hearty[2] and includes a variety of popular names you’ve likely heard of: SPCE (Virgin Galactic, the space tourism company chaired by VC king Chamath Palihapitiya)[3], DKNG (DraftKings, the “tech” “disruptor” to the sports betting industry), and NKLA (Nikola, covered here). Some of the reasons for using a SPAC is to bypass the traditional initial public offering[4] thereby gaining pricing certainty and time[5]. And for shareholders investing in the SPAC, part of the interest may be the chance to invest in tech companies[6] that they wouldn’t have access to[7] as initial capital raises (i.e., seed and series funding) are typically restricted to wealthy individuals and VC funds.

On the other side of the companies seeking to go public are the Sponsors who form the blank check company. Consider activist investors Bill Ackman (Pershing) and Jeff Smith (of Starboard Value), and Richard Branson, the former two who have already formed a SPAC and are currently seeking targets[8], and the latter who has reportedly been seeking to raise $400 million to invest in undervalued American and European consumer businesses in travel, leisure, entertainment, and financial services[9].  It makes sense for them to raise capital if they think there are deals to be had for companies that are currently undervalued by the market due to Covid or private companies that want a SPAC to guide them through the process of going public quickly so that they can capture the current investing mania.

Accordingly, Sponsors are hunting for a target. And in this hunt is the side benefit of having a blank check company … access to valuable information that would-be acquirers may be able to access on potential sellers who are currently private.

What do I mean by valuable information? Think about any M&A diligence process. If you are a potential buyer, part of the negotiation process is accessing the target’s data room[10] to discover what the target is worth. That means that potential buyers (like the SPACs seeking a target) are discovering seller’s material and private information, which could include governing docs, legal structure, board minutes, licenses, permits, material agreements, shareholder agreements, lists (of shareholders and officers/directors), overview of IP and trademarks, standard customer contracts, lists of the company’s biggest channels, supplier agreements, contracts of key employees and list and details regarding employees, real estate agreements, financing agreements, audited financial statements, tax accounts and business plan, amongst other items!

That kind of information is of value, especially if you happen to be an investor in other public companies and are seeking to measure the effect that Covid has had on your present and future investments[11], and especially if some of the targets are in the same space as those very same investments[12]. So, if you are Bill Ackman and your unicorn mating dance[13]  doesn’t go the way you hope and you don’t get the whole enchilada… well, maybe a consolation prize of a trove of information isn’t so bad either.

[1] The typical critique is – even if the share price goes down following the de-spac transaction (i.e., the acquisition of the operating company), financial sponsors benefit because they acquired their shares at the very beginning (i.e., so even if the share price drops 50%, that price still exceeds the sponsors initial contribution).

[2] There’s now an ETF for SPACs. Of course there is: $SPAK. 

[3] Technically went public in October of last year, but I’m counting it. What you feel cheated and want a different SPAC name? Ok, here you go: HYLN. 

[4] As the target of the SPAC they don’t actually have to go through the process of an IPO, instead they are acquired through the de-spac transaction.

[5] “We thought that by going with a SPAC we might leave some value on the table, but we also knew that it would take much longer to [do a traditional IPO,]” says Nikola CFO Kim Brady.” https://www.barrons.com/articles/why-nikola-decided-to-merge-with-a-spac-and-why-more-such-deals-are-coming-51596369610

[6] Assuming that’s the stated goal. Take for example VectoIQ’s (the blank check company that acquired NKLA) prospectus: “we intend to focus on businesses in the industrial technology, transportation and smart mobility industries.”

[7] Its no secret that a significant amount of money has been moving towards private companies over the last decade or two thereby limiting the need for large private companies to tap the capital markets for a capital raise and thereby restricting your mom and pop retail investors from getting in on some of that explosive growth.

[8] Even Billy Beane is getting in on this. The moneyball contrarian known for winning in the regular season but never in the playoffs is co-chair of RedBall Acquisition.

[9] https://www.cnn.com/2020/09/17/investing/richard-branson-spac/index.html

[10] On a case-by-case basis.

[11] Ackman is the big gun here with a $4 billion war chest, whereas Smith has a more modest $360 million. That limits who will open their books.

[12] For example, HLT and potential HLT disruptor Airbnb. However, Pershing Square Tontine (Ackman’s Blank Check Company) states in its prospectus that “we may seek to complete a business combination with an operating company in any industry or sector”. Obviously there will be confidentiality agreements negotiated between the acquirer and the target, but do those agreements have provisions governing information and investments not regarding the target company?

[13] No, my imagination is not that wild, he actually said that. https://www.bloomberg.com/news/articles/2020-07-22/ackman-s-blank-check-company-jumps-in-debut-after-4-billion-ipo