THE ISSUE WITH SPACs
SPAC Bubble Babble Don’t worr y about the market’s supposedly overheated penchant for SPACs. Worr y about the armchair SPAC experts. And consider the risk-free WeWork trade. BY GARRETT BALDWIN
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n August 2019, the news broke that one of the world’s hottest startups was planning its initial public offering. At first, hungry investors salivated at the prospect of biting into one of the most succulent new commercial real estate trends. But they soon lost their appetite. The company’s S-1 filing with the Securities and Exchange Commission revealed structural problems, spiraling debt and ill-advised loans to its CEO. Many questioned whether the company would ever turn a profit. The IPO collapsed. The CEO exited with a multi-billion-dollar payout. And the company’s lofty $49 billion valuation turned into a punchline. But less than two years later, WeWork was looking to go public again. This time, however, nobody was talking about a traditional IPO, and the shared-workspace company’s valuation had been cut by 80%. But the company shared documents with potential investors that said it would seek $1 billion through a deal with a special-purpose acquisition company, or SPAC—a company formed to acquire a private company and take it public. The media and academia responded with a frenzy of criticism. Reporters and talking heads gnashed their teeth as they slapped their keyboards. Tying WeWork to SPACs was a dream come true for
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headline writers and for reporters who’ve been pumping the word “bubble” into the first paragraph of any story about SPACs. Meanwhile, academics, whose tweed jackets had grown tighter after a year of pandemic-dictated confinement to their armchairs, screamed to the financial gods about the alleged foibles of SPACs. The press and academe were united in their insistence that any WeWork deal would expand the “SPAC bubble.” Their musings became the newest chapter in the media’s long-running critique of SPACs. Three considerations First, criticism of SPACs often centers on a profound misunderstanding of venture-forward vehicles, and it’s nothing new. Second, savvy traders aren’t daunted by the volatility implied by a perceived bubble. Third, virtually no one was discussing the possibility that WeWork might align with Bowx Acquisition Corp., the SPAC aligned with former NBA star Shaquille O’Neal. Still, the speculation alone created something beautiful for anyone with money to put to work—a risk-free trade one could leverage to the hilt. And everyone who was stuck in the conversation about a supposed bubble was failing to grasp the meaning of the opportunity. But for some, that trade has been at the heart of two moves that have generated incredible returns. Best of all, regardless of all the bubble talk, traders have a chance to exploit this type of deal immediately. But first, let’s delve into the care and feeding of SPACs. All the world’s a bubble Are SPACs in a bubble? Every day, another flurry of headlines suggests wild deal-making and rampant speculation in the land of SPACs. But everyone should know better. In the world of behavioral finance, SPACs are a source of anomalies. In some cases, they create risk-free trades as clean as a pile of cash just off the government presses. In other cases, they create head-scratching speculation that might rival the cryptocurrency craze of 2017 or the non-fungible token bonanza of 2021—at least on the surface. Either way, two factors fuel speculation at the formation of a SPAC.
Luckbox | May 2021
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4/9/21 11:50 AM
