Unintended consequences.
The reason we don't see them coming is because they are unintended. The benefit of them is we can learn from them. The downside is dealing with the consequences the first time. That's the issue we're seeing with special purpose acquisitions corporations (SPACs) this morning.
The popularity of the group has brought about the attention of the Securities and Exchange Commission, thanks in part to the massive number of SPAC filings we're seen, but mostly due to the Nikola ( NKLA) story, in my opinion.
This hot "sector," if you will, has drawn in lots of momentum traders. I believe it has also drawn in a ton of traders unfamiliar with SPACs, as well as new traders in general.
Forum Merger II ( FMCI) provided today's example for us.
The stock fell hard shortly before Wednesday's close. This morning, it fell from nearly $23 to a low just above $16. The cause? Concerns the merger with The Tattooed Chef wouldn't get approved. The company needs an extension amendment. Traders may be asking why that's an issue. After all, 99% of those who voted, voted to approve the extension for the time to complete the merger to Oct. 31. The problem is only a little over 61% of the outstanding shares have voted. The company needs 65% of the outstanding shares voting in favor of the extension. No vote amounts to a no (against) vote.
Therefore, as it stands now, it is 61% for and 39% against, because roughly 38.4% of eligible voters haven't voted.
I believe the issue here is two-fold. One: many traders, even experienced ones, often ignore proxies that come in via snail mail or email. Two: Traders move on and don't realize they are eligible. I guess we could add a third encompassing laziness, if we wanted to include it.
The long and short of it is without an extension, FMCI shareholders are looking at getting $10.37 per share if the merger isn't completed. FMCI warrant-holders will be seeing a penny.
This potential pushed FMCI holders into panic sell mode this morning. Shares have rebounded, now down "only" 10%. They were as high as $22 at one point, but uncertainty has gripped the stock.
The good news here is also two-fold. First, FMCI sponsors are actively pounding the streets to drum up that last 4% of voters they need to push this through. I can't say for certain it will happen, but I'd say it is more likely than not. Granted, it won't be without sweat on the brow. Second, I believe this will make both sponsors and shareholders more aware moving forward. Expect to see much more active PR from both SPAC and proposed merger partner in upcoming votes, whether for extensions or merger approvals. Shareholders and traders involved in any SPAC will likely become more aware as well after seeing Thursday's action. If you were long any recent momentum name in the space, chances are you noticed it in the price action of your holding.
FMCI is by no-means out of the woods yet. While I played with the dip this morning, I've moved to a more conservative position. I do think it will create opportunities in other names as I see a repeat of this risk diminished now. Unfortunately, when you pair this with the dark clouds over Nikola, the market has cast doubt on all SPACs now, and it may take some time for even the quality names to recover.
