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Investors will learn “a pretty expensive lesson” when they see that some companies that have gone public through special-purpose acquisition companies (SPACs) played “fast and loose with their projections” to “create castles in the sky,” James Chanos, founder of hedge fund Kynikos Associates, said in a statement quoted by the Financial Times.
Chanos, known as a savvy short-seller, predicted the $100-billion collapse of energy firm Enron Corp. in 2001.
A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital, the SPAC buys and merges with a promising company that is not ready to go public by itself.
After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.
Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public are banned from doing.
SPACs became a craze on Wall Street over the past 12 months, with asset management companies and strait-laced investment funds throwing money into the deals, which persuaded individual investors to jump in.
About 370 SPACs have collected more than $100 billion from investors this year alone, according to data firm Refinitiv.
However, SPACs also have drawn regulators’ attention as several of their takeover businesses have failed to perform, as we detailed in our previous coverage (“SPACs: Here Today, Gone Tomorrow?,” 8 June 2021, and “SPACs’ Values Shrink Under Regulators’ Scrutiny,” 20 April, 2021).
Kynikos is now shorting, or placing financial bets against, several “very bad businesses” that SPACs took public and valuations for which “have gotten silly,” Chanos said. He declined to name the companies his fund is shorting.
Lordstown Motors, which a SPAC took public in 2020, said it had enough capital to begin production of its all-electric pickup truck; but earlier this month, it revealed it lacked the funds to do so. At the same time, its chief executive and chief financial officers left the company without notice.
Nikola, another company formed to build an all-electric truck, went public through a SPAC in June 2020 and reached a price of $80 a share. Now its stock is trading below $20 and regulators are scrutinizing its optimistic claims.
“You’re seeing all kinds of situations that probably wouldn’t pass muster in the IPO process that are coming public via the SPAC machinery,” Chanos told the FT.
“We suspect that more and more companies are playing fast and loose with their projections to entice investors to commit capital,” he said.
Under the regulations governing SPACs, the blank-check companies must commit their capital to a deal within two years of being formed.
With so many of the best prospects already taken by other SPACs, about 400 blank-check companies are now cruising the market for new targets, Refinitiv calculates.
“There is an awful lot of capital sitting there that has to find a home,” John Chachas, co-managing principal at Methuselah Advisors, said to The Wall Street Journal earlier this month.
“You’re going to see a fair number of less-than-desirable deals done just because they have to get done,” he said.
TREND FORECAST: In our 4 May article, “IPOs SET RECORD PACE,” we noted that SPACs were among the factors artificially inflating market values… in effect another element creating a dot.com 2.0.
We renew our forecast for a major market correction, with SPACs and their related companies being hit among the hardest. Indeed, the SPAC mania is reminiscent of the dot.com days when billions were invested in hi-tech companies that created nothing and made no financial or common sense.