The House of "Special Purpose" Acquisition Company

SPACs: Worthless Wealth Transfers at the Expense of Retail Investors

The acronym SPAC stands for Special Purpose Acquisition Company. By now, you’ve probably heard the term SPAC bandied about as much as crypto or any other fad in business and investing circles. They’ve really burst onto the scene in recent years. SPACs have raised more money than ever, selling $26B worth of shares in January.

If you detect any theme in my writing, it’s a highly contrarian and skeptical one. I consider myself keen to detect what the oily trend setters are hiding from the masses they’re trying to rip off. Maybe I’m suffering from confirmation bias, but once again, I see malintent masquerading as the next big thing in the form of SPACs.

Interesting but totally unrelated fact; Tsar Nicholas II and his family were kept in the Ipatiev house in Yekaterinaburg. It’s the house in the featured image. It was dubbed “the house of special purpose” before they were murdered by the Bolsheviks in 1917. Wanted to point that out to help set the tone.

What is a SPAC?

SPACs...So Hot Right Now

The name, though somewhat cryptic, does contain the important detail about what a SPAC is. According to Investopedia “A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.” In other words, it’s a company that doesn’t do anything other than raise money to buy another company to merge with. The result being a publicly traded company that does do something.

Seems simple and innocuous enough. Step 1: Raise a bunch of money, Step 2: Buy an existing company, Step 3: ????????, Step 4: Profit! And with all of the ultra rich hype men and self-declared “SPAC Kings” out there heavily implying it’s the path to riches akin to what they have, who wouldn’t get swept up in the resultant mania? It’s a cool new way to go public that more and more companies are using!

The Devil is in the Details: How SPACs are Formed

As PwC points out, SPACs are formed by founders with a nominal investment in return for 20% equity in the blank check company. The remaining 80% of the company is sold in an IPO. You might expect the cost of obtaining that 20% equity to be 1/4 the cost of the remaining 80%, as basic arithmetic implies would be fair, but such is not the case. That 20% equity stake could come from 4-5 people at a total cost of $1M, and the remaining 80% sold for $99M at IPO. These are random numbers, but that’s the general idea.

After the SPAC IPOs, it typically has eighteen to twenty four months to find a company to acquire. The money raised is held in an interest bearing account until an acquisition is made. For various regulatory reasons I don’t understand the SPAC can’t have a deal secured when it’s formed. Should a deal fail to materialize, the money raised at IPO is returned to investors.

So, when the clock is winding down and desperation to find a deal sets in, what do you supposed happens?

How the SPAC Parasites Really Siphon Your Money From You

There seems to be an inherent conflict of interest in acquiring a company with a SPAC. The ROI is heavily imbalanced in favor of the SPAC creators. If $100M is raised through a SPAC with the equity distribution I’ve described, and a deal is struck to buy a company for that amount, the founders $1M becomes worth $20M, while the $99M raised from investors through the IPO becomes worth $80M. Sure makes investing in a SPAC IPO seems like a terrible idea.

The true conflict of interest comes from what I alluded to early. That is, the narrow window through which the SPAC must find an acquisition target. If the SPAC founders know they’re running out of time, they get desperate to complete a deal to magnify the value of their equity. It’s not hard to see how easily this can result in a very poor acquisition being made. By poor acquisition, I mean a company that isn’t worth what the SPAC pays to complete the merger. One that is, to simply put it, a bad business.

Granted, the investors who own SPAC shares do exercise a vote over the deal. Presumably, they can protect themselves this way from potentially disastrous acquisitions. However, they too are likely feeling some duress as the expiration date looms. They did, after all, invest in the first place in hopes of striking a deal. And they’re counting on the celebrity and supposed expertise of the SPAC sponsors. So, why wouldn’t they believe the deal being put to vote is a good one?

The Results…

Are not great. While SPACs seem to consistently enjoy a post-IPO pre-merger “pop” in value, largely due to hype, it’s not something retail investors can often take advantage of. As the article points out, retail investors tend to buy open market shares. That means they get in after the first day pop resulting from the IPO.

The next bit of information is even more disconcerting. From 2012 to 2020, the average returns of all SPACs post-merger equaled -15.6% after one year. The three year average was hardly any better at -15.4%. The “buy and hold” strategy that has served retail investors with the most steady, reliable way to increase net worth and prepare for the future doesn’t work with SPACs. This data helps to validate my theory that SPACs look for acquisitions that aren’t very good.

Another sobering fact the article points out, it’s the hedge funds and institutional investors making advantageous trades that profit from SPACs. They get in at discounted prices which they quickly turn around for a profit. This sends share prices of the merged company down as a glut of supply tends to do. Many of these institutional investors are the ones who form SPACs. They often get that 20% equity for 1% investment I spoke about. Like GameStop, anyone trying to sell you SPACs as a great equalizer is full of shit.

Case In Point About SPAC Lovers

Chamath Palihapitiya, SPAC lover and scumbag extraordinaire.

In case you don’t recognize this cretin with the totally punchable face, his name is Chamath Palihapitiya. He was an early Facebook employee and minority owner of the Golden State Warriors. He’s also a successful venture capitalist. By successful, I mean he shamelessly promotes SPACs he sponsors to the witless on Twitter to bleed them dry. People act like this guy walks on water. And he takes advantage of that slavish devotion he’s somehow managed to cultivate to separate fools from their money.

Perusing Wikipedia makes it easy to find some basic facts about his history that should set off alarm bells for any discerning individual. He’s most well known for his VC fund, Social Capital, which he immediately “burned down” as Axios put it. Turns out he enjoys cavorting around Italy with his girlfriend more than working, and ultimately returned investor capital and converted the fund into a family office. Probably because investors got fed up with his shit.

Also worth noting “During the GameStop short squeeze, Palihapitiya repeatedly attacked Robinhood and its founders for being unethical by selling payment for order flow to high frequency trading firms like Citadel Securities and pushed his fans to switch over to SoFi, which was merging with his SPAC, yet failed to mention that SoFi employs the same practice of selling payment for order flow to HFT firms (including to Citadel Securities) and owns a 16% stake in Apex Clearing Corp, a clearing house involved in the controversy.”

He was so committed to rabble rousing during the GME saga that he telegraphed his purchase of call options. He quickly profited and donated the money to David Portnoy’s relief fund for small businesses. A noble deed, but a cynical one meant to further cultivate his Robin Hood image (no pun intended).

More SPAC-y Bullshit

Why am I so sure of that? One of his latest shady endeavors, Clover Health, a medical insurance company he made $290M off of going public through a SPAC, is undergoing a short squeeze of it’s own. You may not be convinced by now that SPACs are inherently scammy, and not agree as of yet there was anything wrong with Chamath taking Clover public this way. But maybe you’ll change your mind when you learn he lied to investors about the company about not only how it obtains sales, but also the fact that its business model is under investigation by the Justice Department.

If you check out his pinned tweet, you’ll see droves of future bag holders lining up to help him pump up Clover stock to “stick it to the hedgies.” Using the cultish loyalty of his impressionable fanbase, he’s set to drive up the value of a dog shit investment in order to profit tremendously at said fanbase’s expense. It should be pretty transparent what he’s doing. Convince everyone of your faux-heroism by supporting the GME short squeeze. Donate the proceeds and convince users to switch to a platform you own. Profit! Leverage that heroic image to drive another short squeeze. Profit again! All the while gaining users without disclosing a conflict of interest and leaving a lot of regular folks holding bags when the stock rallies you got them behind come crashing back to earth.

Stick it to the hedgies all you want. All of this is engineered to enrich someone who has no use for the riches he obsesses over.

Final Thoughts

In case you’re wondering how this all might come full circle, Chamath’s SPAC record recently has been abysmal. The hit SPACs have been taking across the board has been more profoundly felt by none other than the SPAC king himself. And if you need any more information about his ethics, or lack thereof, the Bloomberg article points out he said he’d sell shares only in the rarest of circumstances, and proceed to sell his Virgin Galactic shares a month later.

Does this sound like the type of guy you’d trust with your money? If there’s one takeaway you should have from my ramblings, it’s not even that SPACs are so awful per se. They are. But what’s most important to learn, is that if some billionaire is hawking something and actually saying it’s good for regular folks with a straight face, he/she thinks you’re one of the suckers born every minute that PT Barnum warned the world about. SPACs are pretty much created to screw people out of money, and the people who create and evangelize them have only that in mind as their end goal.

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