The great SPAC (Special Purpose Acquisitions Corporation) debate rages on. The media disdain is growing. The retail love is showing. And both are right and both wrong. The problem here is we're trying to make the success or risk around a SPAC a binary proposition: all good or all bad. But this vehicle is somewhat plain vanilla while the end result (merger) is not very different than a stock post-IPO or one simply listed on the exchange.
Let me back up a moment. Plain vanilla is probably the wrong term. We need to examine the idea of a SPAC pre-merger and post-merger. Pre-merger, while the entity is no more than cash, I can understand the questions about why the SPAC price should run much beyond the value of the cash in a trust. For instance, most SPACs will IPO around $10 and carry a cash value around $10.00 to $10.20 per share. That's an important point because it essentially equals your downside until merger approval. SPAC holders can opt to redeem shares at the redemption cash value either at set periods or upon certain votes, a merger being one of them. You don't like the deal, then you can sell on the open market or back to the SPAC.
The problem is we have SPACs, without merger partners, letters of intent (LOI), or even rumors that are trading 30% to 40% above their cash value for no apparent reason. Check out Therapeutics Acquisition Corp (RACA) for example. It's traded as high as $16, currently around $14.70, but has nothing more than a small float and a management team to justify the nearly 50% higher price. Without a hell of a good deal, buyers at these prices are asking to be whacked.
But management is important. Seasoned and experienced management with a track record of good deals or success in the market likely deserve a premium, but the question we need to answer is how much. I think a maximum is probably 20%, and that is reserved for a small few. In most cases, traders should be looking to own pre-deal SPACs under $11. As close to $10 as possible is ideal. That's truly the only logical way I see to value these pre-deal. Your investing in managers pursuing a private company in a space you find attractive or managers with a strong track record.
A sidenote here is investors do need to be aware of structure, the amount of Founders shares, Founders warrants, and how the warrants (if any) associated with the IPO are structured.
After a deal is announced, it really isn't much different than what we see with traditional investing. A person needs to dig into the private company and determine what they feel is an attractive price tag. There may be a little extra math required to make sure you understand post-merger valuation at the CURRENT price of the SPAC. Most often when we see an enterprise or market cap posted regarding the initial transaction, it is targeted to $10 (the IPO price).
Like everything else, it requires homework not hate.