In my last post I wrote about the 20% dilution for average SPAC purchasers, and how that 20% is gifted to the sponsor. But in one of the two examples of cashing in that I shared it left open the question ‘What about John Henry, he’s not a sponsor, what did he get out of it?’
Quite simply, he got an excellent opportunity to begin cashing out. Was the SPAC purchase of part of his company done at a reasonable valuation? In this particular instance I have no idea, but overall I suspect that owners selling to SPAC’s are receiving very favorable prices and terms that would not be paid in traditional private markets or in an IPO. While I didn’t want to take the exhaustive amount of time needed to evaluate John Henry’s sale price, I knew that the main conflict of interest in SPAC’s – close a deal, any deal – would make rich hunting grounds for those who do have the time and incentive: short sellers.
My overall hunch when it comes to SPAC targets is there’s a lot of incentive for a sponsor to just get things over the finish line. This leads many of them to focus on businesses that are promotional, sports teams for example, or au courant – say electric vehicles or vaccines, and create a lot of excitement. The price seems to matter less and in the rush they buy it sloppy, paying a hefty price to Henry and others for their shiny objects. Then it only becomes a question if both sponsors and sellers (and other insiders) have enough time to get out at exalted prices, and maybe even extract additional fees, before the bubble pops.
Though Nikola was the first to receive exhaustive short seller treatment in September, it was Muddy Water’s takedown of Multiplan last week that spurred me to write this. More specifically his opening foray on SPAC’s in general:
“In the great present-day money grab known as SPAC promotion, egregious mistakes will be made”
Coming full circle, whereby extremely wealthy sponsors and sellers promote SPAC’s to middle class bag holders, the final piece of the puzzle will start to take shape when looking at 13-fs, or stock holding reports. As the plain-vanilla funds start to gobble chunks of secondary stock it might very well unsuspectingly find it’s way into your portfolio.