Attack of the SPAC

The stories started in January: 2021 was going to be the year of the SPAC. And it was, until it wasn’t. Though maybe it still is! Anyway, by this time, we all know that SPACs are a thing — a force reshaping the capital markets and changing when and how companies become publicly traded. Less clear is how or why they became that force.

Who did this? Chamath Palihapitiya. The Facebook executive turned venture capitalist turned “SPAC king” played an outsized role in the rise of the blank-check deal.

• Silicon Valley has long viewed the traditional IPO as the ultimate prize, the Wall Street stamp of approval on the long road from startup to titan.
• Reverse mergers or blank-check deals smelled fishy. Sometimes literally: Remember when Zapata Corporation, up until then best known for its marine protein business, tried to buy internet portal Excite?
• By 2009, SPACs were moribund. Investor-friendly reforms approved by the SEC in 2011 made them acceptable to the NYSE and Nasdaq and resuscitated the funding vehicle.
• Enter Palihapitiya: Even as his famous VC firm Social Capital was falling apart, he started a SPAC business, Social Capital Hedosophia Holdings, and raised $600 million to buy … something.
• The well-connected investor, who has 1.5 million Twitter followers and a popular podcast, swiftly changed the mood when he did a space SPAC, taking Virgin Galactic public in 2019. Silicon Valley was already disenchanted with Wall Street’s high fees and mispriced deals, and companies like Spotify had embraced the direct listing. SPACs were officially cool.

Palihapitiya was classically ahead of the trend. The SPAC market grew slowly from 2017 to 2019, then took off. In 2021, Merriam-Webster added “blank check company” — another term for the vehicles known as special purpose acquisition companies — to the dictionary. Things started getting bubbly.

• There have been 604 SPAC IPOs raising $160.9 billion this year, compared to 248 raising $83.4 billion in 2020 and 59 raising $13.6 billion in 2019, according to SPACInsider.
• In April, the SEC noted an “unprecedented surge” in the use of SPACs and warned investors of the risks.
• Celebrities from Shaq to Leonardo DiCaprio to former President Donald Trump got involved in SPACs.

Then a lot of SPACs tanked. The point of a SPAC, after it raises money through an IPO, is to merge with an operating business, a process known as a “de-SPAC.” After that, the already-public SPAC shares continue trading, though usually with a new ticker symbol. And that’s when the market transmutes hopes and dreams into often harsh reality.

• BuzzFeed is probably the best-known SPAC flop of 2021. Its shares fell more than 40% after its de-SPAC.
• But it’s far from the only SPAC that gave investors cause to say “Ack!” Home insurer Hippo Holdings is down 72.7%, fintech MoneyLion is down 62.2%, satellite-imaging company Planet Labs is down 37.1%, and home-flipper Offerpad is down 26.4%.
• BuzzFeed CEO Jonah Peretti has no regrets, he recently told Recode’s Peter Kafka. The SPAC structure allowed his company to buy digital publisher Complex, a deal that might have drifted out of reach if BuzzFeed had pursued a conventional IPO.

So is the SPAC bubble ready to pop, or has it already? Palihapitiya’s Hedosophia has two SPACs that have yet to find targets. He’s far from alone: There are hundreds of funded SPACs looking for companies to buy. The real constraint on them, and the SPAC market overall, is the number of quality businesses that deserve to be public. And there’s the rub: The best companies may still go for the gold-standard IPO — like Reddit, which announced Wednesday it had filed a confidential draft registration with the SEC for an offering. If SPACs are to succeed, they’ll have to show how they can help build businesses, not just buzz.

— Owen Thomas (email | twitter)

A MESSAGE FROM ANT GROUP

According to a Nielsen Report, 94% of Chinese tourists said they would pay with their phones if the method becomes more widely adopted overseas; 93% said using that method would likely increase their spending. To meet them where they are, more and more U.S. companies — both here and in China — are embracing Alipay.

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A MESSAGE FROM ANT GROUP

In 2020, U.S. merchants sold over $54 billion worth of products to Chinese customers on Alibaba’s e-commerce platforms, which rely on Alipay to facilitate the transactions. The year prior to the pandemic, Chinese tourists in the U.S. engaged in 800,000 transactions using the Alipay App, for sales valued at $232 million.

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