SPACs Aren’t Cheaper Than IPOs Yet

My basic view of special purpose acquisition companies, which we have talked about here and here and here and here, is that they might be a good way for some companies to go public, but they are expensive, far more expensive than a normal initial public offering. In an IPO, you typically pay investment banks a fee of 1% to 7% of the amount of money you raise, and you sell the stock to investors at a price that is probably too low; probably the stock will trade up by 10% or 20% or 100% on the first day that it’s public. People complain about both of these things—IPO fees and IPO pops—constantly; venture capitalists are always going around saying that the IPO process is broken and that something needs to replace it. Last year that something was direct listings; this year SPACs are getting all the attention.

A SPAC, or blank-check company, is an empty shell that raises money from investors in a public offering and uses that money to find a (usually private) target company and merge with that target; the merger results in the target raising money (the money in the SPAC) and becoming public. The SPAC typically pays investment banks a fee of 5.5% of the money it raises, which is effectively passed on to the company that it takes public. It might also pay more investment banking fees for the merger with that company. It typically gives its sponsor—the famous investor or operator who runs the SPAC and finds a target company to take public—20% of its stock virtually for free, which, again, is passed on to that target company. So SPAC fees are about a quarter of the money raised, three or four times as much as you’d pay in an IPO, albeit better disguised. Like an IPO, a SPAC will acquire its target company at a price that is probably too low; the SPAC is in business to get a good deal for its shareholders, so it wants to take the target public at a price that is below fair value. And in fact some of the high-profile recent SPACs have essentially paid $10 a share for companies that immediately traded up to $20 or $30 per share, the sort of embarrassing IPO pop that venture capitalists love to complain about.1 SPACs also give their investors warrants, which means that if the stock does go up the company has to give away even more of it. So SPACs do not avoid the underpricing effect of IPOs; they probably exacerbate it.