Investment Idea

New winds in corporate acquisitions on Wall Street

Mikael Syding
16/09/2020 | 2 min read

You often get advice from experienced investors to focus on the leading people behind a company rather than on the business per se.

You often get advice from experienced investors to focus on the leading people behind a company rather than on the business per se.

If you take the idea to heart you can invest your money in a so-called SPAC (Special Purpose Acquisition Vehicle - an "acquisition company") which is basically listed as a bag of money on a stock exchange, and where the SPAC has the right to acquire companies in a particular industry. As an investor, you do not know which company or companies the acquisition plans apply to, but you must at best be content with knowing in which main area the acquisitions are to be made - if only because the principals behind the SPAC have clear industry experience. The idea behind the scheme is that the SPAC's founders must or have already identified private companies which by being acquired by a SPAC, can more easily and more quickly take a shortcut to an IPO.

By 2020, US SPACs have already raised more than $ 30 billion. The previous record of just under $ 14 billion from last year thus looks to be beaten by perhaps 200%. Investors' willingness to write blank checks to other experienced investors is obviously record high.

Among the more notable SPACs in 2020 is the hydrogen truck company Nikola, which through a reverse acquisition of the listed SPAC VectoIQ could thus be listed on the stock exchange without expensive IPO costs and extensive listing prospectuses. Virgin Galactic, which offers small commercial space jumps for tourists, was bought for half by a listed SPAC last year. The largest SPAC to date, Pershing Square Tontine Holdings (PSTH), raised $ 4 billion this summer, but the website lists the company's financial resources at $ 5-7 billion. PSTH is not only the largest but perhaps the most secret as well - the fund's target objects are only marginally limited to "qualitative IPO candidates", "mature unicorns" (private companies with at least $ 1 billion in value), "private equity companies" and, "family-owned businesses". In practice, PSTH can thus buy any company.

The result for SPACs have mostly not been great so far. One of the risks for investors in a SPAC is that management may be stressed by being forced to use the money, regardless of the price of the acquisition objects, within the usually stipulated deadline of two years. Otherwise, the money must be returned and the SPAC dissolved.

The interest in both SPACs and regular IPOs shows not least that there is plenty of capital looking for investment ideas. In the wake of the Covid-19 pandemic, many industries have changed rapidly. Hotels, restaurants and aviation have been strongly negatively affected, which has created a great need for restructuring. At the same time, companies with digitally oriented activities in entertainment and homework have received a historic boost, which gives rise to completely different investment opportunities when the winning map is redrawn. Expect more or less surprising mergers and acquisitions in both losing sectors and winning industries, where, for example, the latter may be exposed to surprising competition from aggressive SPACs that find smaller but high-quality digital “microcorns”.

@Mikael Syding

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.