Stories
Stories
Podcast
17.12.2020
The man who wants to reach for the stars has come a lot closer to his goal on this day in September 2019. Wearing a spacesuit, US billionaire Richard Branson stands legs apart in front of the mighty pillars of Wall Street, fireworks shooting out behind him, briefly resembling a shower of stars. When it dies down, confetti cannons explode and fire the colorful shards across Wall Street. Branson poses, bending his arms at shoulder height as if to show: I'm this strong.
Branson truly pulled off a tour de force in September 2019. Virgin Galactic, the US multi-billionaire's space company, became the first private manned spaceflight company to be officially listed on the New York Stock Exchange. This has poured a large sum of money into Branson's coffers and brought him a step closer to the stars, where he would like to go with his space flights.
Virgin Galactic's IPO had a special signal effect not only because Branson is an eccentric. The truly sensational thing was the way in which Branson attached his star to the stock market firmament. Instead of a normal IPO, Branson cheated his way onto Wall Street via a merger - through a back door, so to speak.
This backdoor is probably the most important topic on the US stock markets at the moment and goes by the acronym "Spac". The acronym stands for special-purpose acquisition company, i.e. a listed acquisition vehicle. This Spac is listed on the stock exchange like a normal corporation, but has no business behind it, no production of cars, no dispatch centers or similar, but is an empty shell, pumped full of money from investors.
Star managers promise investors dream returns and that they will find a real company with which the Spac can merge within 24 months. The newly created company is then floated on the stock exchange at a fixed price. The investors in turn hope that the company's shares will then rise and they will earn a lot of money. If the manager is unable to find a company to take over, or if an investor does not want to go along with the takeover, the investors get their investment back.
But while the managers are promising a lot, critics are already warning of valuation bubbles and of companies cheating their way onto the trading floor that are not yet ready for the stock market. Can this work?
Virgin Galactic is not the first company to go public in this way, but it is a milestone. "Vigin Galactic has catapulted Spacs into a completely different dimension, especially in terms of attention from the press and the financial markets," says Douglas S. Ellenoff, himself a lawyer and veteran in the field of Spacs. For years, these shell companies were only a field for a few specialists who operated in the high-risk niche. This is because it is usually young companies that go public, many of which have never made a profit. They are therefore just as risky as a start-up investment - and possibly similarly overvalued.
But with low interest rates and an ever-increasing appetite for risk among investors, Spacs are suddenly becoming interesting for investors. "Investors want the returns from Silicon Valley and are therefore getting into companies earlier than if they were to buy shares on the stock market first," says Ellenoff, and predicts: "The golden age is only just beginning."
The figures from recent months suggest that Ellenoff could be right. In an extremely volatile market that is pumped full of money thanks to the central bank's expansive monetary policy, Spacs IPOs such as Virgin Galactic broke record after record in 2019. According to the scene blog SPACInsider, there were ultimately 59 Spac IPOs. The hype multiplied once again in 2020. The blog currently counts 210 Spac IPOs with a volume of more than 70 billion US dollars. By comparison, there was just one in 2009 - with a volume of 36 million US dollars.
The current hype is undoubtedly also fueled by the fact that most blank companies are run by big names. The former Speaker of the House of Representatives, Paul Ryan, is Chairman of the Board of Directors of a Spac, ex-UBS boss Sergio Ermotti has joined a Blanko company as CEO and ex-Google boss Eric Schmidt now earns his money as a consultant for Spacs. By the time Bill Ackmann put his name on the line, the hype was unstoppable. The star of the hedge fund industry has so far raised a staggering four billion US dollars with his blank-check company and the entire financial market is puzzling over which company he wants to invest so much money in. Nothing seems too big for the Spacs anymore. Even the Bloomberg media group was already under discussion, but denied it.
While managers such as Ackmann are still searching, other companies have already managed to find a Spac as a sponsor and to place themselves on the stock exchange through it. In addition to Virgin Galactic, these include the betting provider Draft King and the truck manufacturer Nikola, which has already been confronted with serious allegations and whose managing director had to resign as a result. Was the company not yet ready to go public?
It is precisely such cases that pose a major threat to the trend. Since their early days more than 20 years ago, Spacs have had a bad reputation because they were often associated with trickery involving penny stocks, i.e. shares worth less than five dollars. Many US Americans lost the money they had invested.
Today, the regulations for shell companies are stricter and protection for investors is better. However, it is still difficult for investors to assess the situation. Initially, they blindly trust the managers - and even they are obviously not always on the ball. The Greek music streaming service Akazoo was the latest start-up to go public that may never have had that many users. And truck manufacturer Nikola was confronted with serious accusations after its IPO, for example that the technology in advertising videos did not come from the company itself. A few weeks and a few critical articles later, first the boss, then announced partners said goodbye and the share price plummeted. From more than 90 US dollars at times, the share price fell to just 15 US dollars.
Virgin Galactic's IPO, on the other hand, went very well. The price of ten US dollars per share for the IPO has now risen to over 30 US dollars. That is a profit of more than 200 percent, which investors have already cashed in on. So it remains a bet, and a risky one at that.
So while investors hope that their returns will multiply and not vanish into thin air, the question remains: why do companies want to go public through the back door at all?
Call Martin Steinbach, Head of IPOs and Listing Services for Germany, Austria and Switzerland at EY (formerly Ernst & Young). For more than 25 years, he has been keeping an eye on the events surrounding IPOs of both small and large companies in Germany, Europe and the USA. The fact that the topic has gained so much momentum in recent months is due in particular to the volatility: "If you are planning an IPO, you want calm waters for the placement phase so that you don't list below value on the stock exchange," says Steinbach. "But nowadays you can hardly plan two weeks in advance, which increases the volatility and price risk of traditional IPOs."
"We will see many Spacs in Europe in the coming years" - Douglas S. Ellenoff, Spac expert
In fact, the preparation for a traditional IPO takes around twelve months. In the placement phase, this includes a roadshow around the world to find institutional investors and lenders who offer to buy Y amount of shares for X price. The price for which a share is listed on the stock exchange is thus determined through a competition of supply and demand, and therefore how much money comes into the company's coffers. "Recently, however, the valuation for IPOs has often been too low internationally or has been reduced at short notice. The share price then rose sharply in the first few days. That's money that the companies didn't get," Steinbach reports from his experience over the past decades.
This risk does not necessarily exist with a Spac because the buyer offers the company to be acquired a certain degree of security. The sellers know from the outset how much money they will give for how many shares and, in this case, only have to come to an agreement with one company. "This means they know how high the dilution of the shares will be," explains Steinbach from EY. Conversely, the disadvantage is that investors are happy to pay for this security, for example by demanding more shares. "Whether this is worthwhile for a company has to be calculated on a case-by-case basis," says Steinbach.
So is the Spacs euphoria over or is it just beginning? Spac pro Ellenoff just smiles mischievously when asked about the future. "We will see a lot of Spacs in Europe in the coming years," he says. "But they will all be listed on US stock exchanges, not in Europe," predicts the Spac veteran, while Steinbach from EY agrees with the thesis. He sees the strong US Spac dominance as a problem in the future, as potential stock market candidates or high-tech companies will not be listed in their home market. "That would be a disadvantage for the stock exchanges in Germany, France or London," says Steinbach. "Because then domestic markets and investors would lose attractive stock market candidates."
Stories
17.12.2020
Nils Wischmeyer
Spacs are shell companies filled with billions of dollars that are under the wing of star managers. By merging with real companies, they are currently taking hundreds of companies public. Can this be an alternative to normal IPOs?
The man who wants to reach for the stars has come a lot closer to his goal on this day in September 2019. Wearing a spacesuit, US billionaire Richard Branson stands legs apart in front of the mighty pillars of Wall Street, fireworks shooting out behind him, briefly resembling a shower of stars. When it dies down, confetti cannons explode and fire the colorful shards across Wall Street. Branson poses, bending his arms at shoulder height as if to show: I'm this strong.
Branson truly pulled off a tour de force in September 2019. Virgin Galactic, the US multi-billionaire's space company, became the first private manned spaceflight company to be officially listed on the New York Stock Exchange. This has poured a large sum of money into Branson's coffers and brought him a step closer to the stars, where he would like to go with his space flights.
Virgin Galactic's IPO had a special signal effect not only because Branson is an eccentric. The truly sensational thing was the way in which Branson attached his star to the stock market firmament. Instead of a normal IPO, Branson cheated his way onto Wall Street via a merger - through a back door, so to speak.
This backdoor is probably the most important topic on the US stock markets at the moment and goes by the acronym "Spac". The acronym stands for special-purpose acquisition company, i.e. a listed acquisition vehicle. This Spac is listed on the stock exchange like a normal corporation, but has no business behind it, no production of cars, no dispatch centers or similar, but is an empty shell, pumped full of money from investors.
Star managers promise investors dream returns and that they will find a real company with which the Spac can merge within 24 months. The newly created company is then floated on the stock exchange at a fixed price. The investors in turn hope that the company's shares will then rise and they will earn a lot of money. If the manager is unable to find a company to take over, or if an investor does not want to go along with the takeover, the investors get their investment back.
But while the managers are promising a lot, critics are already warning of valuation bubbles and of companies cheating their way onto the trading floor that are not yet ready for the stock market. Can this work?
Virgin Galactic is not the first company to go public in this way, but it is a milestone. "Vigin Galactic has catapulted Spacs into a completely different dimension, especially in terms of attention from the press and the financial markets," says Douglas S. Ellenoff, himself a lawyer and veteran in the field of Spacs. For years, these shell companies were only a field for a few specialists who operated in the high-risk niche. This is because it is usually young companies that go public, many of which have never made a profit. They are therefore just as risky as a start-up investment - and possibly similarly overvalued.
But with low interest rates and an ever-increasing appetite for risk among investors, Spacs are suddenly becoming interesting for investors. "Investors want the returns from Silicon Valley and are therefore getting into companies earlier than if they were to buy shares on the stock market first," says Ellenoff, and predicts: "The golden age is only just beginning."
The figures from recent months suggest that Ellenoff could be right. In an extremely volatile market that is pumped full of money thanks to the central bank's expansive monetary policy, Spacs IPOs such as Virgin Galactic broke record after record in 2019. According to the scene blog SPACInsider, there were ultimately 59 Spac IPOs. The hype multiplied once again in 2020. The blog currently counts 210 Spac IPOs with a volume of more than 70 billion US dollars. By comparison, there was just one in 2009 - with a volume of 36 million US dollars.
The current hype is undoubtedly also fueled by the fact that most blank companies are run by big names. The former Speaker of the House of Representatives, Paul Ryan, is Chairman of the Board of Directors of a Spac, ex-UBS boss Sergio Ermotti has joined a Blanko company as CEO and ex-Google boss Eric Schmidt now earns his money as a consultant for Spacs. By the time Bill Ackmann put his name on the line, the hype was unstoppable. The star of the hedge fund industry has so far raised a staggering four billion US dollars with his blank-check company and the entire financial market is puzzling over which company he wants to invest so much money in. Nothing seems too big for the Spacs anymore. Even the Bloomberg media group was already under discussion, but denied it.
While managers such as Ackmann are still searching, other companies have already managed to find a Spac as a sponsor and to place themselves on the stock exchange through it. In addition to Virgin Galactic, these include the betting provider Draft King and the truck manufacturer Nikola, which has already been confronted with serious allegations and whose managing director had to resign as a result. Was the company not yet ready to go public?
It is precisely such cases that pose a major threat to the trend. Since their early days more than 20 years ago, Spacs have had a bad reputation because they were often associated with trickery involving penny stocks, i.e. shares worth less than five dollars. Many US Americans lost the money they had invested.
Today, the regulations for shell companies are stricter and protection for investors is better. However, it is still difficult for investors to assess the situation. Initially, they blindly trust the managers - and even they are obviously not always on the ball. The Greek music streaming service Akazoo was the latest start-up to go public that may never have had that many users. And truck manufacturer Nikola was confronted with serious accusations after its IPO, for example that the technology in advertising videos did not come from the company itself. A few weeks and a few critical articles later, first the boss, then announced partners said goodbye and the share price plummeted. From more than 90 US dollars at times, the share price fell to just 15 US dollars.
Virgin Galactic's IPO, on the other hand, went very well. The price of ten US dollars per share for the IPO has now risen to over 30 US dollars. That is a profit of more than 200 percent, which investors have already cashed in on. So it remains a bet, and a risky one at that.
So while investors hope that their returns will multiply and not vanish into thin air, the question remains: why do companies want to go public through the back door at all?
Call Martin Steinbach, Head of IPOs and Listing Services for Germany, Austria and Switzerland at EY (formerly Ernst & Young). For more than 25 years, he has been keeping an eye on the events surrounding IPOs of both small and large companies in Germany, Europe and the USA. The fact that the topic has gained so much momentum in recent months is due in particular to the volatility: "If you are planning an IPO, you want calm waters for the placement phase so that you don't list below value on the stock exchange," says Steinbach. "But nowadays you can hardly plan two weeks in advance, which increases the volatility and price risk of traditional IPOs."
"We will see many Spacs in Europe in the coming years" - Douglas S. Ellenoff, Spac expert
In fact, the preparation for a traditional IPO takes around twelve months. In the placement phase, this includes a roadshow around the world to find institutional investors and lenders who offer to buy Y amount of shares for X price. The price for which a share is listed on the stock exchange is thus determined through a competition of supply and demand, and therefore how much money comes into the company's coffers. "Recently, however, the valuation for IPOs has often been too low internationally or has been reduced at short notice. The share price then rose sharply in the first few days. That's money that the companies didn't get," Steinbach reports from his experience over the past decades.
This risk does not necessarily exist with a Spac because the buyer offers the company to be acquired a certain degree of security. The sellers know from the outset how much money they will give for how many shares and, in this case, only have to come to an agreement with one company. "This means they know how high the dilution of the shares will be," explains Steinbach from EY. Conversely, the disadvantage is that investors are happy to pay for this security, for example by demanding more shares. "Whether this is worthwhile for a company has to be calculated on a case-by-case basis," says Steinbach.
So is the Spacs euphoria over or is it just beginning? Spac pro Ellenoff just smiles mischievously when asked about the future. "We will see a lot of Spacs in Europe in the coming years," he says. "But they will all be listed on US stock exchanges, not in Europe," predicts the Spac veteran, while Steinbach from EY agrees with the thesis. He sees the strong US Spac dominance as a problem in the future, as potential stock market candidates or high-tech companies will not be listed in their home market. "That would be a disadvantage for the stock exchanges in Germany, France or London," says Steinbach. "Because then domestic markets and investors would lose attractive stock market candidates."
About the author
Nils Wischmeyer
Nils Wischmeyer writes about financial markets, investments, banks, banking regulation and white-collar crime.
