The SPAC Timer Is Running And Billions Need To Get Invested

Decades ago, there was a comic book issue in which Jimmy Olsen, Daily Planet cub reporter and recurring character in Superman, faced a challenge. He had written about the wanton spending of a multi-millionaire.

The rich guy turned around and challenged him to spend some amount of money–I think it was $1 million, but this was a long time ago–in 24 hours. He couldn’t buy more than one of any given item and had to spend it all out to keep an equivalent amount. So, it was a yacht here, an airplane there, all of which was crazy because even at the time he was racking up bills far beyond what he needed to spend.

At the very end, he had a dime left when time ran out. The irony was that he had parked his car, could have used the dime to get some time on the meter, and ended up with a parking ticket. But lots of money ultimately going to charity.

What brought that to mind was a new report from the makers of Calcbench financial software. (Disclosure: I have a free journalist account, don’t mention them as a result, and do like their tools.) The company added in coverage of SPACs, or special purpose acquisition companies. The numbers show that there’s going to be a rush on investments, and when there’s a crowd, you can practically bet on pumped up prices.

If you have managed to avoid all the noise about the category, SPACs are ways to take businesses public without a traditional IPO. A SPAC is publicly held shell that raises money and then uses it to buy some business. The business subsumes the SPAC and becomes a public company, ultimately able to raise money in the capital markets by selling shares. WeWork, which had a disastrous attempt at an IPO in 2019, is in the process of finally getting its wish via a SPAC.

WeWork’s latest “business update” mentioned numbers but none with dollar signs, raising the question of how good the performance has been if items like revenues and profits are kept out of sight. It should also be a more general warning sign for investors.

Calcbench did a search on companies with a SIC code of 6770, the code for blank-check companies, or SPACs. By December 31, 2020, there were 189 SPACs that had submitted current financial statements. In the first quarter of 2021, however, the number jumped to 358. “Huge amounts of money poured into SPACs in the first quarter of 2021, when the SPAC frenzy seemed to be at its height,” the Calcbench blog post noted. “Total assets soared from $12.56 billion in Q4 2020 to more than $109 billion in Q1 2021, while average assets per firm jumped from $172 million to $311 million in the same period.”

Using the Calcbench tool, you can see that the variation is extremely wide. In the first quarter of 2021, eight of the SPACs had at least $1 billion in assets, with the biggest–Pershing Square Tontine Holdings–sitting on just over $4 billion.

On the other end is Sandston Corp. with $203. Not billion, million, or even thousand.

As for revenue, only 20 of them had any. Infrastructure & Energy Alternatives pulled in $276.4 million in the quarter at the top. At the bottom of actually having revenue was Plum Acquisition Corp., with $2. No, the decimal is not misplaced. The vast majority had zero.

What this suggests is that most of the SPACs, which only have two years to make their investments before having to return money to investors, are desperately in need of a deal. Many have significant funds.

That’s the formula for a mad dash to find a fitting acquisition, with the initial types of targets the SPACs had for the “right” purchase going out the window. When lots of money chases a limited number of options, prices go up and investors increasingly take the risk of a haircut. Combine that with companies getting blank checks to do something, and the conditions are set to part people from their money.

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