SPACs could provide protection in the falling stock market
Jump to heading SPACs could provide protection in the falling stock market
Assume you and a group of other investors combine your resources to employ an acquisitions specialist. This dealmaker leverages the enormous sum of money obtained to help negotiate a fantastic deal to purchase an existing firm. The arrangement with the dealmaker is that if he discovers anything intriguing, you will all be able to vote on whether or not they should go ahead for you. If the vote is yes to proceed, and you are still not interested, you may have your money returned to you personally (add interest earnings minus expenses).
The danger is that you and the others are holding up funds that might be invested elsewhere (even though you can still sell at secondary market levels). In other words, opportunity cost. In return for tying up your money while the expert looks for an acquisition on behalf of the group, if an acquisition is identified, you get to opt in or out, or, as previously said, sell shares if the proposed merger causes a surge in share price (potential to profit). If you opt out or no acquisition is discovered, the agreement states that you will get your cash back after deducting costs and revenue.
This is the basis of a SPAC, or Special Purpose Acquisition Company. Participants in the initial SPAC IPO might opened themselves up for a range of options and chances. In the end, they may be faced with the same decision that Let's Make a Deal contestants face: "Do you want to retain the cash, or accept what's behind the curtain?"
Keeping the Money
As an example, the biggest SPAC ever financed had an IPO two years ago at the uncommon starting price of $20 per share. SPAC IPOs are typically priced at $10 per share. During the IPO, 200 million shares at $20 each were sold. Both sponsor and stockholders agreed on a two-year time frame for the sponsor to select and proceed toward purchasing a target – or deliver to shareholders the cash held in trust to accomplish the acquisition.
Pershing Square Tontine Holdings - Class A (PSTH) is nearing the day when it may be obliged to release the money held in escrow to existing stockholders. According to Part I of their Balance Sheet as of March 31, 2022 (SEC 10-Q), the Class A common stock was worth $4,004,044,295 at the time. This is an increase from the end of the previous quarter and exceeds the $4 billion put in by founding owners.
If the PSTH sponsors, including Bill Ackman, Chairman and Founder of the hedge fund Pershing Square Tontine Holdings, cannot find a match over the next few weeks, they will be forced to disburse what is expected to be more than $4 billion held in the trust. This is about equivalent to the initial IPO price of $20 per share. This escrow essentially acts as a floor on market losses for SPAC investors who get in early and make choices on mergers and ownership when they occur.
The money that is locked up for up to two years has an opportunity cost. For example, the S&P 500 increased 16% over the two-year SPAC rollercoaster that PSTH investors experienced and are now practically exactly where they started.
Behind Curtain #2 and #3
While the S&P has risen 16% since this specific business went public, the stock market's attitude has now changed, and the wider market has lost 18% thus far in 2022.
Original holders of Pershing Square Tontine Holdings may have planned to one day own stock in a world-changing firm with a bright future. However, there were other owners who retained it for various reasons. The stock soared from its initial trading day and finally hit a high of $34 in February 2021. Despite Pershing's failure to locate an acquisition, investors trading the SPAC IPO might have outperformed the market.
Since last July (2021), the stock has been trading below the IPO price of $20, shareholders' cash has been earning interest in escrow, and any expected dividend may be more than where it has been trading for over a year. This would beat the S&P 500 returns in 2022 by about 20%.
Take it away
Players picked from the Let's Make a Deal audience are given an initial reward, usually a few hundred dollars in an envelope. They are then asked whether they want to take a chance on something larger but perhaps riskier. Their risk is restricted in that they can always opt out and know exactly what they have (cash), or if they continue to gamble, they may end up with more than they arrived with.
SPACs are one-of-a-kind, with their own set of risks and possible benefits. A well-chosen name that trades close or below the initial IPO price lowers investors' risk in ways that other common stock purchases cannot. There is still room for growth since any rumor of a merger, or an actual merger, would impact the price, but its price swings have a minimal link to the wider market. With significant volatility, this might be beneficial.
Moreover, unlike the general market potential, there is security against it falling significantly in a down market.
For more SPAC news check out our other articles. To view all updated SPAC metrics for over 700 U.S.-listed SPACs, including liquidation date, yield to liquidation, last price, gross spread, and much more sign up for a free SPACinformer account.
(As of June 14, 2022, funds managed by Cohanzick Management, LLC and its affiliates own a position in Pershing Square Tontine Holdings)
Original source: Paul Hoffman, Managing Editor for Channelchek
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