Shareholders of the Special Purpose Acquisition Company (“SPAC”) Multiplan Corp. are suing deal sponsors, who made millions while regular investors lost big. Should we pity these investors, or chalk up another case of fools and their money being soon parted?
Experience Is The Best Teacher — A Fool Can Learn No Other Way
The plaintiffs’ lawsuit reminds me of a Soviet-era joke about an American tourist in Moscow. He is so busy gawking at eye-catching buildings and banners that he steps into an open trench.
He awakens in the hospital, both his legs in casts. “This is crazy,” the American complains to the doctor, a survivor of wars, famines, and purges. “In any civilized country, a deadly hazard like that would be surrounded by barriers and red flags.”
“True,” the doctor replies. “How come you didn’t notice ours at the border?”
Special Purpose Acquisition Companies (SPACs) allow average investors to bet on initial public offerings (IPOs) sponsored by the hottest names in commerce and finance.
Streamlining IPOs By Jettisoning Investor Protections
SPACs — also known as a “blank check companies” — go public before starting commercial operations.
Going public without an operating history or line of business simplifies the performance reporting and risk analysis required by securities regulations.
Not every regulation enhances value, of course. But, in this case, IPO speed and savings come from end-running disclosures intended to protect average investors. Such investors have the least deal experience, zero negotiating leverage, and scant ability to understand filings and financial statements.
Going public via SPAC represents a bargain for sponsors, but whether net tradeoffs are positive for the average investor may be less certain.
Backing The Big Names
Investing in SPACs also allows average investors to invest with big-name financiers and even celebrities. Notable SPAC sponsors include Bill Ackman (Pershing Square Tontine Holdings), Linked-In co-founder Reid and Hoffman, Zynga founder Mark Pincus (Reinvent Technology Partners), and Shaquille O’Neal (Forest Road Acquisition Corp.)
Investing with is not the same as investing alongside, however. SPAC sponsors tend to be the sharpest, most grasping investors around. Average investors putting their money in a SPAC might expect to feed at the same trough as sponsors, but it is the sponsors who will eat first, get the choicest bits, and — before anyone else — walk away full.
And SPAC sponsors have very big appetites.
Multiplan Corp: Bad Deal, Boondoggle, or Both
In February 2o20, Former Citigroup dealmaker Michael Klein raised $1.1 billion in equity through the IPO of SPAC Churchill Capital Corp. III.
In October 2020, this SPAC invested the funds via a reverse merger in Multiplan Corp., a company that provides cost-containment services in healthcare. The deal valued Multiplan at $11 billion. Concurrently with this investment, other private investors put an additional $2.6 billion into Multiplan.
The IPO and Multiplan acquisition were structured to give Klein and the partners at his investment bank discounted stock, plus $15 million in fees. Although Multiplan’s stock is down 30% from its acquisition price, Klein and his sponsor-team members reportedly have seen their own $20 million investment blossom sevenfold, to $140 million.
Plaintiff shareholders in the Multiplan litigation allege misleading or absent disclosures about Multiplan before and since the SPAC acquired it.
End Of An Era?
So far in 2021, SPACs comprise nearly 2/3 of equity raised via IPO.
This market has sharply cooled, though. From March to April, the number of new SPACs fell from 109 to 10, or more than 90%.
Causes for the drop off include unfavorable accounting rulings by the SEC, as well as poor SPAC performance.
For average investors, SPAC-land is inherently hazardous.
And the hazards are obvious.
Enter at your own risk!