
Could IPOs be replaced by blank check acquisitions (SPAC)? - kaboro
https://www.quora.com/Could-IPO-s-be-replaced-by-blank-check-acquisitions-SPAC?share=1
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joschmo
As someone that's raised money for SPACs, been an advisor to SPACs and sold
companies to SPACs, the answer is a resounding no. Most VC-backed companies,
whether in tech or biotech, don't need the strategic shift that's core to a
SPAC thesis. You usually get bought by a SPAC when you need new management to
come in and kill darlings for long-term health, not as an option to go public.

The folks that think it's a method to avoid day-one price pops are mostly
incorrect. Price pops are intentional as selling 10% of your company at a
discount fills up the IPO book much faster and causes 10x+ oversubscriptions.
This signals strong demand to the majority of very large asset allocators who
come in post-IPO. Those investors psychologically overvalue day-one pops years
into the stock's public lifetime. I've had conversations with heads of tech
investing at many $100bn+ funds who mention day-one pops when they enter a
stock 5 years post-IPO. Doing the math, strong market confidence in your
company pays dividends when you're selling the other 90%.

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valuearb
The underpricing pop disappears faster than a fart in the wind. Underpricing
in IPOs is direct theft of value from shareholders and employees to investment
banks and their clients, and provides zero value for the company.

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nuclearnice1
Why does it persist?

I can think of three non-exclusive possibilities:

* Market power of banks

* Corruption of the stock-compensated managers who benefit from the pop

* Genuine or perceived benefit to the company in further price raising. (Mentioned above)

~~~
lmm
There's an (also non-exclusive) argument that it's a fair price for the risk
that IPO buyers are taking. IPOs do "fail" sometimes, so the pop isn't as
great a risk-adjusted return as it looks.

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ketzo
At least the way I understand it, SPACs offer a trade off, not an upgrade.

The danger of an IPO (from the perspective of the company going public) is the
“IPO Pop”: you offer your stock at $20, by the end of the first day it’s
trading at $40, and you realize you left a bunch of money on the table.

This is a benefit to the initial investors, who make a big profit day 1.

The inverse risk is the opposite (see Lyft, Slack IPOs): you offer your stock
at $20 and it ends the day trading at $10. This sounds bad for you, the
company, but it’s kind of fine — you raised the money you wanted to raise. In
the short term, it’s bad for your _investors_ , who just lost a big chunk of
change.

My numbers here are made up, but the important thing is the spread: an IPO
could pop 5% on first day, or 100%, or -80%. The difference there is
volatility, which is what you have to pay a bank for — the risk that they lose
money instead of popping.

In times of increased volatility (hello 2020!), you’re gonna have to pay a
lot. The bank is going to underprice your stock to try and get a bigger “pop”,
which, remember, means you’re probably leaving some money on the table.

A SPAC offers a compromise. “Negotiate with us instead, and avoid the pop (or
the drop) entirely!” You reduce volatility in exchange for taking a private
deal and potentially leaving some money on the table. It’s trading a bigger
payday for a smaller risk, which looks pretty good right now. But in times of
more financial normalcy, expect more IPOs.

My understanding of SPACs vs. IPOs is based entirely on Matt Levine’s
excellent Money Stuff column, btw — go check that out if you want to read
stuff from someone who actually knows this stuff.

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teej
The pop of an IPO is by design though. Bankers engineer the opening price
lower than market so they can sell the stock pre-IPO to their rich clients and
guarantee a quick return for them.

The games bankers like Goldman play with IPO pricing only benefit the bankers.
The whole thing is bullshit, which is why more tech companies are looking for
ways to cut bankers out of the process.

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nordsieck
> The whole thing is bullshit, which is why more tech companies are looking
> for ways to cut bankers out of the process.

Google IPOed with a dutch auction. I have absolutely no idea why other
companies trying to "cut bankers out of the process" don't follow suit.

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harryh
Investment Bankers are performing a service for companies that IPO. For this
service they get paid. One of the ways that they get paid is buy allocating
IPO shares to favored clients. If you change the system so that they cannot
get paid this way, then they will end up getting paid another way: higher
fees.

Is that worth the tradeoff? Maybe. But it's very unlikely that there is a free
lunch to be had here.

~~~
nordsieck
> Investment Bankers are performing a service for companies that IPO.

Sure. But that service is largely marketing. They do a roadshow and talk up
your company to everyone who will listen.

That's certainly a valuable service. I'm sure it's even worth it to many
companies.

I don't really see how it's that useful for well known B2C companies (e.g.
Facebook and Tesla).

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chii
private investors may know these famous companies like Tesla, but they may not
know the details of their business operations. The investment bankers create a
prospectus which describes the "story" of how these companies plan to make
money, present financials in a way that is understandable (albeit likely an
optimistic way), and then sell the investment as an opportunity.

For doing this work, the bankers do get paid handsomely. Whether this work
results in a better investment price for said company remains to be determined
tbh, but on the whole, i suspect it must be net positive, otherwise this
method of IPO won't have continued for a century.

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bogomipz
>"The investment bankers create a prospectus which describes the "story" of
how these companies plan to make money, present financials in a way that is
understandable (albeit likely an optimistic way), and then sell the investment
as an opportunity."

How different are these prospectus from the reports that the companies already
provide to their investors and boards though? I guess I'm asking isn't that
"story" already written for them?

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necubi
Matt Levine has been writing about this trend lately:

* [https://www.bloomberg.com/news/newsletters/2020-06-23/money-...](https://www.bloomberg.com/news/newsletters/2020-06-23/money-stuff-bill-ackman-wants-a-mature-unicorn)

* [https://www.bloomberg.com/opinion/articles/2020-07-14/everyo...](https://www.bloomberg.com/opinion/articles/2020-07-14/everyone-wants-a-blank-check)

The gist is that an SPAC is less risky than an IPO for the company (you only
have to negotiate with a single entity, and odds of an agreement falling
through are much lower) but in return you're going to have to compensate the
SPAC for taking on that risk by lowering the price.

That tradeoff is more appealing in uncertain times than in good times.

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jacques_chester
For those wondering what the heck a SPAC is, this seems to be what it's about:
[https://en.wikipedia.org/wiki/Special-
purpose_acquisition_co...](https://en.wikipedia.org/wiki/Special-
purpose_acquisition_company)

> _A special purpose acquisition company (SPAC), sometimes called blank-check
> company, is a shell company that has no operations but plans to go public
> with the intention of acquiring or merging with a company with the proceeds
> of the SPAC 's initial public offering (IPO)._

I'm still not entirely clear what the implications are.

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Spooky23
Sounds like another financial innovation to avoid transparency.

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Jommi
It gets even worse when you talk about reverse mergers. For example the way
some chinese companies have become listed in the US is just buying out a penny
stock company and listing through that.

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crote
As someone who knows nothing about stocks: why aren't they just auctioned off?

Start by selling the highest bidder the amount of stock they bid for, then
continue with the next-highest bidder until the supply is depleted. Wouldn't
that guarantee the best value for the company?

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necubi
That's more or less how a direct listing works. Historically direct listings
have been rare, but recently Spotify and Slack have successfully done it.

The main downsides (aside from it just being unusual and therefore a bit
risky) is that for regulatory reasons the company can't sell new shares this
way, so it's just a means to go public and doesn't raise any money.

However, once the company is public (and has an established price) nothing is
stopping them from doing a secondary offering.

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WrtCdEvrydy
> regulatory reasons the company can't sell new shares this way

So can only direct list for a followup, not for an initial?

I'd love to issue 1 million shares and just sell them to the pending buy
orders on a market.

~~~
chii
it'd be easy for the company to commit fraud by doing this. That's why it's
disallowed.

An IPO which is underwritten by sophisticated investors will be assumed to
have done due diligence and thus, less likely to be an act of defraud.

Hertz tried to sell more shares during their bankruptcy, and needed to ask the
SEC for permission (to which the SEC is pretty much denied it).

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Animats
You can IPO via an auction. Google did.[1] That's useful when you have
confidence the IPO will be oversubscribed, and don't really need underwriters.

[1] [https://www.cnet.com/news/google-files-for-
unusual-2-7-billi...](https://www.cnet.com/news/google-files-for-
unusual-2-7-billion-ipo/)

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pmorici
If the main dig against traditional IPOs is that they are miss priced I don't
see how SPACs fix that. Two SPAC offerings in recent memory that I'm aware of,
Virgin Galactic, and Nikola both had huge run ups soon after the mergers
happened. This dynamic seems more likely to be a product of hype and limited
available shares initially due to lockup periods.

~~~
ketzo
But critically, the misprice is not what matters _to the companies raising
money_. What matters to them is the amount of money they’re able to raise
initially, and that can be higher in a SPAC deal. Or it could be lower! But
it’s less volatile.

~~~
beervirus
But from first principles, it should basically always be lower.

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ketzo
Yeah, but even if it's lower, the number is _certain_ , decided on over the
negotiating table. In an IPO, you don't know till the day of your IPO exactly
how much you're going to raise.

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dimes
When a company does an IPO, they hire an underwriter that guarantees that
they'll sell a specific amount of stock at a specific price. So the company
knows how much money they'll raise by the time the first day of trading
arrives.

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cortesoft
Matt Levine has written a number of interesting articles about SPACs recently.
In times of high volatility, they become more attractive.

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crb002
Seems less burdensome to find a large publicly traded company willing to
invest with shares of their non-volatile stock. Say megacorp buys a 30% stake,
then vested employees get a distribution of 30% of their vest as megacorp
stock. You might call this IPO Lite. Benefits of market liquidity for all the
shareholders and retain the limited dilution of an IPO.

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Lazare
A SPAC gives more certainty but less money. An IPO gives more money but less
certainty.

Most of the criticism of IPOs has been over their _cost_ , and a SPAC is
strictly worse.

So...no. SPACs have been (and will continue to be) relatively popular in times
of high volatility where their lower risk is worth their higher price, but in
general, nobody is clamoring for an IPO replacement that gives even more money
to financial intermediaries.

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LatteLazy
A better question is why this keeps happening? The only thing I can think is
that most employees can't sell their stock on IPO day, they're locked in for
months to years. So they don't care if the IPO is undervalued, they'll sell at
the true value later on.

But what about non employee investors? Why do they sign off on IPOs knowing
the stats?

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jshaqaw
SPACs are a bull frenzy market phenonemom. The winners are the investment
banks who collect insane fees between insurance and deal advisory. The other
winners are sponsors who get the fattest fee payout in the financial ecosystem
dwarfing hedge funds or private equity. Believe me investors are not the
winners.

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cdolan
Dont sponsors also take on the highest risk?

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jshaqaw
They do. If they don’t close a deal they are stuck with all the transaction
costs. This leads to adverse selection of deals as a SPAC will always choose
to do any deal over dissolving without a deal.

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beervirus
This question has it exactly backwards. SPACs cost the company _more_ money
than the IPO pop. With a SPAC you’re buying more certainty than the IPO gives
you, and that doesn’t come for free.

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tehabe
I would prefer if companies would stay private much, much longer. The stock
market is extremely irrational and believes almost every hype. Which makes a
lot of IPOs overpriced in the first place.

~~~
zrail
The problem is that employees of these large private companies are working for
somewhat below market wages in exchange for illiquid equity. If these
companies stay private for a long time they either have to cash out equity or
offer more cash compensation.

Edit: option tender offers are absolutely a thing but I don’t think I’ve ever
heard of an RSU tender offer.

~~~
user555555555
I kind of wish the startups would direct-list on the stock market, and then
the early employees have liquidity from the start. This doesn't stop the
company raising more money if they're young, they can still issue shares. I'm
guessing that theres some downsides to this that I'm not seeing, anyone know?

~~~
toast0
Once a stock has at least 2,000 acredited shareholders or 500 unacredited
shareholders (was 500 shareholders without regard to acreditation before the
2012 Jobs Act), SEC disclosure requirements apply the same as if had IPOd.
Allowing/encouraging trading of the stock is going accelerate the time that
that happens. Facebook aproaching the shareholder limit was one of the things
that pushed them to IPO --- might as well raise some money if you have to
prepare all the disclosures and follow all the accounting rules, anyway.

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foghornleghorn
IPO's what?

~~~
donarb
Exactly!

