By Therese Poletti, MarketWatch
MarketWatch photo illustration/Getty Images, iStockphoto
The blank-check bonanza has already reached mind-boggling heights, but now we seem to have jumped the shark.
A preliminary prospectus was filed last week by a company called Burgundy Technology Acquisition Corp . seeking to raise $400 million for a special-purpose acquisition company, or SPAC, an entity that seeks to raise money to acquire an unnamed company that is also known as a “blank check” company. Behind Burgundy is a familiar face for tech investors, though one that hasn’t been seen in a few years: former Hewlett-Packard Co. and SAP AG /zigman2/quotes/207905606/composite SAP -0.87% Chief Executive Leo Apotheker, who will be co-CEO of Burgundy along with former SAP colleague James Mackey.
In case you don’t remember Apotheker’s reign as CEO of pre-spinout H-P, the important part of that brief period for these purposes is one of the worst acquisitions in tech: the $11 billion acquisition of a U.K.-based data analytics software company called Autonomy. Just a year after making that deal, H-P stunningly wrote off $8.8 billion of the purchase price and admitted it had substantially overvalued Autonomy, leading to lawsuits and charges on both sides of the Atlantic.
Apotheker was ousted after less than a year on the job, but Hewlett-Packard Enterprise Co. /zigman2/quotes/201998588/composite HPE +0.48% is still dealing with the fallout, mostly in the form of endless litigation. It has already paid out $100 million to settle a shareholder suit and other lawsuits, including a civil case it filed in the U.K. and a criminal case in the U.S. that are still ongoing.
While it would be foolhardy to hand a CEO with such a horrific acquisition on his résumé a blank check to have another try, the SPAC bonanza on Wall Street has grown so huge that anything is believable. After a raft of blank-check acquisitions made huge waves with the Robinhood crowd — Virgin Galactic Holdings Inc. /zigman2/quotes/208333884/composite SPCE -7.87% , Nikola Corp. /zigman2/quotes/208704275/composite NKLA -7.37% and DraftKings Inc. /zigman2/quotes/213120645/composite DKNG -2.22% most prominent among them — there has been an unprecedented flood of filings.
All told, the SPAC-fest is like nothing Wall Street has ever seen, already setting an annual record for amount raised. So far this year, 57 SPACs have raised $21.3 billion in the IPO market, excluding overallotments; last year, a total of 59 blank check companies raised $12.1 billion, which was a record at the time.
At the rate new offerings are flowing into the Securities and Exchange Commission, we may already have beaten the record for number of SPACs with four-plus months to go in 2020. Since July 31, 14 blank check companies have filed to raise a stunning sum of $5.5 billion, according to Renaissance Capital. That wave follows a filing for the biggest blank check company yet, billionaire hedge-fund manager Bill Ackman’s $4 billion Pershing Square Tontine Holdings Ltd.
“We’re about to break last year’s full-year SPAC IPO count of 59, the highest number in a year ever,” said Matthew Kennedy, a senior strategist at Renaissance Capital, a provider of IPO-focused ETFs /zigman2/quotes/207665280/composite IPO -1.80% /zigman2/quotes/200372997/composite IPOS -0.94% . “And based on recent filings, activity is only going to increase heading into the fall.”
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SPACs were created in the 1990s, an outgrowth of a far riskier vehicle popular in the go-go 1980s: the blind pool. Some blind pools were created and dissolved without making a single investment, leading to the eventual creation of the SPAC, the blank check company, which has tighter controls. The biggest protection is that in exchange for not knowing what company will be acquired, investors have the option at the time an acquisition is announced to decide to hold or redeem the initial investment at cost (plus accrued interest).
SPACs in general are a different proposition for investors because they are investing in the people running them, with no information or financial data on an acquisition target until a deal is struck. Renaissance noted in a recent blog post for subscribers that most SPACs fail to live up to the hype — the return so far this year is a bit over 4%, Kennedy said in an email, despite the wild gains for a few outliers.
Goldman Sachs in a recent report noted that most of these deals perform poorly over the longer term, after an acquisition is finally made, underperforming both the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.72% and the Russell 2000 /zigman2/quotes/210598147/delayed RUT -1.49%
“During the 1-month and 3-month periods following the acquisition announcement, the average SPAC outperformed the S&P 500 by 1 percentage point and 11 percentage points, respectively, and beat the Russell 2000 by 6 percentage points and 15 percentage points, respectively,” Goldman wrote in the report. “However, the average SPAC underperformed both indexes during the 3, 6, and 12-months after the merger completion.”
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Recent high-profile SPAC acquisitions have started off well, but could struggle for any gains in the near term as the companies could be years away from making real money. One such example is much-hyped space tourism company, Virgin Galactic, which was taken public last year through a SPAC formed by venture investor and former Facebook Inc. /zigman2/quotes/205064656/composite FB +2.33% executive Chamath Palihapitiya. Earlier this week, Virgin Galactic /zigman2/quotes/208333884/composite SPCE -7.87% reported no revenue in the second quarter and again delayed its first trip to space for founder Richard Branson, while announcing that it will dilute its SPAC investors by issuing another 20.5 million shares.