Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day
Today’s Topic: SPACs: The “Blank Check” Boom and Bust
I try to avoid “manias.” The latest stock market example was the “SPAC” bubble of late 2020. SPAC stands for “Special Purpose Acquisition Company.” The boom bust cycle of the last year repeats that of the “reverse merger” mania of the 1990s. Today, a few notes. Experts — please chime in. Correct, elaborate, elucidate.
WHAT ARE SPACS? HOW MANY CREATED IN 2019, 2020, 2021?
1. “SPACs are publicly traded corporations formed with the sole purpose of effecting a merger with a privately held business to enable it to go public.”
2. “Compared with traditional IPOs, SPACs often offer targets higher valuations, greater speed to capital, lower fees, and fewer regulatory demands.”
3. “In 2019, 59 were created, with $13 billion invested; in 2020, 247 were created, with $80 billion invested; and in the first quarter alone of 2021, 295 were created, with $96 billion invested.”
NB “Then there’s this remarkable fact: In 2020, SPACs accounted for more than 50% of new publicly listed U.S. companies.”
QUANTUMSCAPE: from $24 to $132 to $21.
1. QuantumScape is a company that does research into solid state lithium batteries for electric vehicles. Investors include Bill Gates and Volkswagen.
2. The SPAC opened for trading on November 27, 2020 at $24.80 and quickly rose to $37 on the first day of trading. On December 28 the stock peaked at $132.
3. It was recently trading for $21.
THE NEGATIVE FEEDBACK LOOP
1. “Share-price declines can create a negative feedback loop for SPACS, because investors have the right to pull money out of blank-check companies before mergers go through.”
2. “They are much more likely to do that when SPACs trade below their listing price, which many currently are. More than 95% of the blank-check companies yet to announce deals trade below that level.”
3. “Large investor withdrawals can leave the company going public with much less cash, making it harder to meet its business targets and potentially fueling a deeper drop in the stock.”
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