What Might Stop the SPAC Train in its Tracks?

BarkBox appears to be in line to go public via a merger with a special purpose acquisition company or SPAC for short.

And another SPAC comes to market.

The list seems unlikely to stop just as 2020 ends — meaning that, of course, the trend will continue into next year.

And so the question looms as to whether the special purpose acquisition company (SPAC) will be the backdoor entry to the public markets.

At this writing, and as reported in this space on Thursday (Dec. 17), BarkBox, the subscription service that is focused on pet supplies, is merging with blank check form Northern Star Acquisition Corp. in a $1.6 billion deal. An initial public offering (IPO) would, according to reports, fetch (no pun intended) as much as $454 million.

Way back in 2017, the company was reportedly mulling an IPO or even a sale.  One might wonder why now would be the time to merge and go public. Perhaps it’s a case of striking while the iron is hot.

After all, as SPAC Insider estimates, SPACs IPOs (so far) this year number 241, with an average deal size of $335 million and gross proceeds of nearly $81 billion, which far outpaces the 59 deals and gross proceeds of about $13.6 billion in 2019.

As to what one buys when they buy a SPAC — keep in mind that investors are effectively buying into a vehicle (the IPO as SPACs sell shares) that goes hunting for acquisitions.

And when acquiring a company, as the old investing aphorism goes: Price is what you pay, value is what you get.

All manner of companies have gone public through SPACs, from subscription companies (as we’ve just seen) to satellite companies (such as AST) to sports plays (DraftKings).

And, as Goldman Sachs predicts, as reported by CNBC, the rally has legs.  “We expect a high level of SPAC activity will continue into 2021,” David Kostin, Goldman’s head of chief U.S. equity strategy, said in a note quoted by the site. “Increased retail trading activity has also boosted interest in early-stage SPAC targets. SPACs have low opportunity cost for investors when policy rates are near zero.”

In other words, with relatively low rates of return expected from other avenues of investments, SPACs offer upside.

In terms of the mechanics, the management team that steers the SPAC — where you might see a marquee name such as, say, billionaire Bill Ackman — finds a target company.  They take the company public upon the acquisition.

But there’s a big “if” involved. If there is no deal — in other words, if there are no acquisition targets that spark a deal, then after a set period of time (typically two years), the SPAC gives the capital back to the investors, and the investment vehicle is liquidated.

The speed at which SPACs take shape and take on acquisitions may make the traditional IPO process seem stodgy by comparison, as it involves a long process of filing documents and conducting roadshows and gauging interest on the Street (not to mention underwriters). Many firms, among them less established ones, perhaps with rocky operating histories ahead of them, may garner SPAC interest if valuations continue to be stretched, as markets soar higher.

Deploying the capital may be a better bet than having to return it to investors (which could tarnish management reputations, after all), due to at least the prospect of some return on investment — leaving a crowded field ever more crowded until it all comes tumbling down.

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