[HN Gopher] Could IPO's be replaced by blank check acquisitions ...
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Could IPO's be replaced by blank check acquisitions (SPAC)?
Author : kaboro
Score : 44 points
Date : 2020-07-18 18:43 UTC (4 hours ago)
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| jshaqaw wrote:
| SPACs are a bull frenzy market phenonemom. The winners are the
| investment banks who collect insane fees between insurance and
| deal advisory. The other winners are sponsors who get the fattest
| fee payout in the financial ecosystem dwarfing hedge funds or
| private equity. Believe me investors are not the winners.
| cdolan wrote:
| Dont sponsors also take on the highest risk?
| ketzo wrote:
| At least the way I understand it, SPACs offer a trade off, not an
| upgrade.
|
| The danger of an IPO (from the perspective of the company going
| public) is the "IPO Pop": you offer your stock at $20, by the end
| of the first day it's trading at $40, and you realize you left a
| bunch of money on the table.
|
| This is a benefit to the initial investors, who make a big profit
| day 1.
|
| The inverse risk is the opposite (see Lyft, Slack IPOs): you
| offer your stock at $20 and it ends the day trading at $10. This
| sounds bad for you, the company, but it's kind of fine -- you
| raised the money you wanted to raise. In the short term, it's bad
| for your _investors_ , who just lost a big chunk of change.
|
| My numbers here are made up, but the important thing is the
| spread: an IPO could pop 5% on first day, or 100%, or -80%. The
| difference there is volatility, which is what you have to pay a
| bank for -- the risk that they lose money instead of popping.
|
| In times of increased volatility (hello 2020!), you're gonna have
| to pay a lot. The bank is going to underprice your stock to try
| and get a bigger "pop", which, remember, means you're probably
| leaving some money on the table.
|
| A SPAC offers a compromise. "Negotiate with us instead, and avoid
| the pop (or the drop) entirely!" You reduce volatility in
| exchange for taking a private deal and potentially leaving some
| money on the table. It's trading a bigger payday for a smaller
| risk, which looks pretty good right now. But in times of more
| financial normalcy, expect more IPOs.
|
| My understanding of SPACs vs. IPOs is based entirely on Matt
| Levine's excellent Money Stuff column, btw -- go check that out
| if you want to read stuff from someone who actually knows this
| stuff.
| thekyle wrote:
| I always imagined that companies that have their stock price
| "pop" after IPO would've been better off doing a DPO instead
| (like Spotify) since they would've gotten more money.
| teej wrote:
| The pop of an IPO is by design though. Bankers engineer the
| opening price lower than market so they can sell the stock pre-
| IPO to their rich clients and guarantee a quick return for
| them.
|
| The games bankers like Goldman play with IPO pricing only
| benefit the bankers. The whole thing is bullshit, which is why
| more tech companies are looking for ways to cut bankers out of
| the process.
| formercoder wrote:
| I believe SPAC targets might also have lower regulatory burdens
| not entirely sure.
| beervirus wrote:
| This question has it exactly backwards. SPACs cost the company
| _more_ money than the IPO pop. With a SPAC you're buying more
| certainty than the IPO gives you, and that doesn't come for free.
| joschmo wrote:
| As someone that's raised money for SPACs, been an advisor to
| SPACs and sold companies to SPACs, the answer is a resounding no.
| Most VC-backed companies, whether in tech or biotech, don't need
| the strategic shift that's core to a SPAC thesis. You usually get
| bought by a SPAC when you need new management to come in and kill
| darlings for long-term health, not as an option to go public.
|
| The folks that think it's a method to avoid day-one price pops
| are mostly incorrect. Price pops are intentional as selling 10%
| of your company at a discount fills up the IPO book much faster
| and causes 10x+ oversubscriptions. This signals strong demand to
| the majority of very large asset allocators who come in post-IPO.
| Those investors psychologically overvalue day-one pops years into
| the stock's public lifetime. I've had conversations with heads of
| tech investing at many $100bn+ funds who mention day-one pops
| when they enter a stock 5 years post-IPO. Doing the math, strong
| market confidence in your company pays dividends when you're
| selling the other 90%.
| cortesoft wrote:
| Matt Levine has written a number of interesting articles about
| SPACs recently. In times of high volatility, they become more
| attractive.
| tehabe wrote:
| I would prefer if companies would stay private much, much longer.
| The stock market is extremely irrational and believes almost
| every hype. Which makes a lot of IPOs overpriced in the first
| place.
| zrail wrote:
| The problem is that employees of these large private companies
| are working for somewhat below market wages in exchange for
| illiquid equity. If these companies stay private for a long
| time they either have to cash out equity or offer more cash
| compensation.
|
| Edit: option tender offers are absolutely a thing but I don't
| think I've ever heard of an RSU tender offer.
| tehabe wrote:
| I think the issue is, that many don't even have a working
| business model and are despesrate to find one after they went
| public. Even though sometimes, there is simply no business
| model, no way to earn money with a service, no way to make a
| profit. And in such a situation a company should pay their
| employees in equity or take money from investors who
| essentially speculate for a good IPO to get their investment
| back.
| ralph84 wrote:
| Valuations that in hindsight end up being too optimistic aren't
| unique to public markets. WeWork didn't have to go public to be
| valued at $47 billion. In fact it was the act of trying to go
| public that brought the valuation back to reality.
| tehabe wrote:
| valuations of private companies are even more volatile than
| for "public" companies. in the case of WeWork it seems to me
| it was more like a scam of investors who fell for it. I
| stopped wondering when I read that some of the buildings were
| owned by the WeWork founders and leased by WeWork.
| necubi wrote:
| Matt Levine has been writing about this trend lately:
|
| * https://www.bloomberg.com/news/newsletters/2020-06-23/money-...
|
| * https://www.bloomberg.com/opinion/articles/2020-07-14/everyo...
|
| The gist is that an SPAC is less risky than an IPO for the
| company (you only have to negotiate with a single entity, and
| odds of an agreement falling through are much lower) but in
| return you're going to have to compensate the SPAC for taking on
| that risk by lowering the price.
|
| That tradeoff is more appealing in uncertain times than in good
| times.
| pmorici wrote:
| If the main dig against traditional IPOs is that they are miss
| priced I don't see how SPACs fix that. Two SPAC offerings in
| recent memory that I'm aware of, Virgin Galactic, and Nikola both
| had huge run ups soon after the mergers happened. This dynamic
| seems more likely to be a product of hype and limited available
| shares initially due to lockup periods.
| ketzo wrote:
| But critically, the misprice is not what matters _to the
| companies raising money_. What matters to them is the amount of
| money they're able to raise initially, and that can be higher
| in a SPAC deal. Or it could be lower! But it's less volatile.
| [deleted]
| beervirus wrote:
| But from first principles, it should basically always be
| lower.
| jacques_chester wrote:
| For those wondering what the heck a SPAC is, this seems to be
| what it's about: https://en.wikipedia.org/wiki/Special-
| purpose_acquisition_co...
|
| > _A special purpose acquisition company (SPAC), sometimes called
| blank-check company, is a shell company that has no operations
| but plans to go public with the intention of acquiring or merging
| with a company with the proceeds of the SPAC 's initial public
| offering (IPO)._
|
| I'm still not entirely clear what the implications are.
| Spooky23 wrote:
| Sounds like another financial innovation to avoid transparency.
| Jommi wrote:
| It gets even worse when you talk about reverse mergers. For
| example the way some chinese companies have become listed in
| the US is just buying out a penny stock company and listing
| through that.
| dodobirdlord wrote:
| It seems like the gist of it is that taking a startup public is
| a pain in the ass on account of regulatory complexity, so you
| just create a shell company with a charter that says that if it
| goes public with enough money it will buy your startup in a
| private transaction. Then you IPO your shell company, which is
| easy because it has no operations. If it raises enough money
| you sell your startup to it, and if not you return the money to
| the shareholders.
| foghornleghorn wrote:
| IPO's what?
| crote wrote:
| As someone who knows nothing about stocks: why aren't they just
| auctioned off?
|
| Start by selling the highest bidder the amount of stock they bid
| for, then continue with the next-highest bidder until the supply
| is depleted. Wouldn't that guarantee the best value for the
| company?
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