fbpx
Connect with us

News

EXPLAINER: What’s a SPAC, the latest craze on Wall Street?

Associated Press

Published

 on

SPAC

WeWork will finally go public this year, allowing investors to buy and sell its shares. But not through a traditional IPO.

In the two years since the office-sharing company’s failed IPO, a new way to launch a stock on Wall Street has become fashionable: SPACs.

Special purpose acquisition companies have been embraced by big institutions and small-pocketed investors alike. Celebrities and famous athletes have endorsed them.

SPACs have raised more than $96.5 billion in less than three months so far this year. That tops the $83.3 billion raised in all of last year, which itself was six times bigger than the prior year, according to SPACInsider. Well-known companies such as Draftkings and Virgin Galactic used a SPAC to go public last year.

“I didn’t take them seriously until I saw the momentum,” said Susan Winter, head of global loan syndications at Silicon Valley Bank.

Lately, however, banks, regulators and some investors are taking a more cautious look at these red-hot investments. Critics point to risks inherent in how SPACs are constructed, while others see the maniacal fervor for them as one sign of a bubble in the stock market.

WHAT’S A SPAC?

SPACs are publicly traded but have no real business. A SPAC is essentially just a pile of investors’ cash. The goal is to use those millions of dollars to take a private company public without using the traditional initial public offering process that’s been around for decades.

Billionaire hedge fund investor Bill Ackman raised $4 billion last year for his own SPAC, known as Tontine Capital. Chamath Palihapitiya, an early Facebook employee and chairman of Social Capital, has multiple SPACs and is using one to take SoFi, the online financial services startup, public later this year.

WHY ARE THEY SO POPULAR?

SPACs sell shares to the public, typically at $10 apiece, and then set out to find their target. That low entry price can allow small-fry investors to invest in some young companies that previously would have been accessible only to the wealthy and venture capitalists.

According to a recent report from BofA Global Research, 40% of SPAC trading on BofA’s platform from July to December of 2020 was driven by retail investors, compared to just 21% of stock trading for both the S&P 500 and the Russell 2000.

“It used to be that we would see a new SPAC every week, or every two weeks. Now we are seeing four SPAC listings a week,” said Harris Arch, a co-portfolio manager of the DuPont Capital Merger Arbitrage Strategy fund.

For companies, a merger with a SPAC provides a quicker timeline for going public and fewer disclosure requirements. When the SPAC acquires a target, the acquired company takes the SPAC’s spot on an exchange and typically gets a new stock ticker.

A traditional IPO requires a company to hire an investment bank, produce mountains of materials for investors to scrutinize, eventually talk to potential investors in what’s known in Wall Street parlance as a “road show,” and then — if everything lines up correctly — go public.

IPOs get derailed all the time, however. The required disclosures may reveal some unattractive financials, which happened with WeWork two years ago, or the timing might not work, perhaps because the stock market is too volatile at the moment.

WHAT’S NOT TO LIKE?

The game is often stacked in favor of the SPAC’s management, also referred to as the “sponsors,” and initial investors.

Management has a financial incentive to find an acquisition target — most often management receives a 20% stake in the newly public company. They also get shares in the new company at a significant discount to the value the company agrees to use to go public, which can dilute the value of the shares held by retail investors.

Further, each SPAC has its own expiration date, typically two years from its creation, after which the funds of the SPAC must be returned to its investors.

All these factors give SPAC sponsors a reason to make a deal, regardless of whether it truly makes financial sense for both the company and the investors, critics say. Investors do get a say on management’s acquisition target, voting it up or down, but SPAC investors often consist of Wall Street banks and the SPACs own sponsors, which may stack the deck in favor of a “yes” vote.

Also since SPAC target companies bypass the traditional IPO process — and all the checks and due diligence that comes from it — companies that may not be fully ready to go public are now being listed on stock exchanges.

Since investors do not know the target company ahead of time, SPACs are sometimes referred to as “blank check companies.” It’s this “blank check” issue that has given some on Wall Street pause.

Swiss bank UBS has directed its financial advisors to only recommend SPACs to eligible clients if the bank is an underwriter and therefore has sufficient information about the company to make a recommendation, according to people familiar with the matter. That’s because there is limited information about a SPAC generally available to the public until it actually buys another company.

A spokeswoman at UBS declined to comment.

WHAT DO REGULATORS SAY?

The frenzy surrounding SPACs has also attracted the attention of government regulators, who are concerned they may draw in unsophisticated investors.

The Securities and Exchange Commission released a report in December outlining the pros and cons of investing in SPACs, in which it cautioned investors about the potential conflicts involving the SPAC’s management.

Last week, the SEC put out a bulletin warning investors not to base their investing decisions solely on whether a celebrity or star athlete has endorsed the product. The SPAC acquiring WeWork, BowX Acquisition, lists Hall of Famer Shaquille O’Neal as an adviser. Other athletes such as Alex Rodriguez and Stephen Curry have endorsed SPACs or put their own money into a SPAC entity. Former Trump economic advisor Larry Kudlow has also created a SPAC.

“It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the SEC bluntly said.

HOW HAVE SPACS PERFORMED?

After posting some eye-popping gains in 2020, SPACs have come back to earth. An exchange-traded fund consisting of SPACs and companies taken public through SPAC acquisitions, the Defiance Next Gen SPAC fund, jumped 55% between early November and mid-February. It has since dropped from around $35 to $27 and is down 6.7% so far this year compared to the 4.9% return of the S&P 500.

The declines come as the prospects for an improving economy and a pickup in inflation have driven investors to move money away from some high-flying parts of the market, such as technology stocks.


CHARLOTTE, N.C. (AP) — By Ken Sweet

Advertisement

News

Biden tells execs US needs to invest, lead in computer chips

Associated Press

Published

 on

Biden tells execs US needs to invest, lead in computer chips

President Joe Biden used a virtual meeting with corporate leaders about a global shortage of semiconductors to push Monday for his $2.3 trillion infrastructure plan, telling them that the U.S. should be the world’s computer chip leader.

“We need to build the infrastructure of today, not repair the one of yesterday,” he told the group of 19 executives from the technology, chip and automotive industries. “China and the rest of the world is not waiting and there’s no reason why Americans should wait.”

He said the country hasn’t made big investments to stay ahead of global competitors, and it needs to step up its game.

Biden made an appearance at the meeting between administration officials and company leaders held to discuss developing a stronger U.S. computer chip supply chain. The meeting came as the global chip shortage continued to plague a wide array of industries.

CEOs of AT&T, Dell, Ford, General Motors, Stellantis (formerly Fiat Chrysler), Intel, Northrop Grumman, and others were scheduled to attend.

But industry experts say there’s little they can do to stem the shortage, which has delayed a new iPhone and forced automakers to temporarily shut factories because they’re running short of the multiple computers needed to run engines, transmissions, brakes and other essential features.

Instead, Biden brought up developing a U.S. chip supply chain since most are made in Asia and shipped to the U.S. In February he ordered a review of the supply chain and pledged to work with international partners to ensure stable supplies.

Wedbush analyst Daniel Ives said there’s little that can be done immediately to end the current problem. “This could change things over the next three to five years, but for right now, there’s no structural changes that could alleviate the shortage,” he said.

The shortage already has made it harder for schools to buy enough laptops for students forced to learn from home, delayed the release of popular products and created mad scrambles to find the latest video game consoles.

But things have worsened in recent weeks, particularly in the auto industry, where factories are shutting down because there aren’t enough chips to finish building vehicles that are becoming rolling computers.

The coronavirus pandemic touched off a cascade of events that led to the problems. Chip factories had to shut down early last year, particularly overseas where most processors are made. By the time they reopened, they had a backlog that was worsened by unforeseen demand. Personal computer demand, for instance, spiked as government lockdowns forced millions of office employees and students to work or attend class remotely.

High demand for consumer electronics squeezed the auto industry. Chip makers compounded the pressure by rejiggering factory lines to better serve the consumer-electronics market, which generates far more revenue for them than autos.

After eight weeks of pandemic-induced shutdown in the spring, automakers started reopening factories earlier than expected. But they found out that chip makers weren’t able to flip a switch quickly and make the more robust processors needed for cars. Industry executives say the shortage should start to end by the third quarter of this year.

It’s merely a symptom of a larger problem of the U.S. relying too much on Asia for critical parts such as semiconductors, said Ives said, who called the meeting long overdue. “I think now it’s just exposing the structural issues as well as some of the potential national security issues the U.S. faces, given our reliance on Asia,” he said.

The U.S. has only 12% of the world’s semiconductor factory capacity, down from 37% in 1990, according to the Semiconductor Industry Association.

Not surprisingly, the major players in the chip industry welcomed the opportunity to gain even more support from the Biden administration to help subsidize the efforts to expand the supply and distribution of processors likely to play an integral role in the economy for decades to come.

“We appreciate the White House meeting with industry leaders about the importance of ensuring a strong and resilient semiconductor supply chain,” said the semiconductor association, a trade group whose board of directors includes three CEOs who participated in Monday’s discussions.

The association’s other members include three major chip players outside the U.S., Samsung, Taiwan Semiconductor Manufacturing Co. and NXP, who sent executives to the meeting.

Intel CEO Pat Gelsinger warned a future shortage of chips “could have a devastating economic impact, or worse, compromise our national defense.”

The trade group representing Ford, General Motors and Stellantis thanked the administration for pressing chip makers to fill automakers’ orders. “It is imperative that all efforts are made to ensure our auto industry remains indispensable to the U.S. economy and American jobs,” Matt Blunt, president of the American Automotive Policy Council, said in a statement.

The shortage comes just as the auto industry is accelerating plans to shift away from internal combustion vehicles, shifting more toward those powered by batteries.

As part of his $2.3 trillion infrastructure plan, Biden wants to spend $174 billion over eight years on electric vehicles. That figure includes incentives for consumers, grants to build 500,000 charging stations, and money to develop U.S. supply chains for parts and minerals needed to make batteries. Biden also wants Congress to put $50 billion into semiconductor manufacturing and research.


WASHINGTON (AP) — By TOM KRISHER and ALEXANDRA JAFFE

Continue Reading

News

Chinese regulator orders Ant Group to conduct major overhaul

Associated Press

Published

 on

Chinese regulator orders Ant Group to conduct major overhaul

Chinese regulators have ordered Ant Group, a financial affiliate of e-commerce giant Alibaba Group Holding, to become a financial holding company to ease financial oversight amid stepped up scrutiny of technology firms.

In a meeting Monday, the central bank and other financial regulators also ordered Ant to cease anti-competitive behavior in its payments business and improve its risk management and corporate governance, according to a statement on the website of the People’s Bank of China.

The guidance follows a decision by regulators last November to suspend a planned $34.5 billion initial public offering just days before Ant’s trading debut. Officials cited changes in the regulatory environment.

Ant Group is the world’s largest financial technology company. It was valued at $150 billion after a 2018 fundraising round, and its valuation later rose to $280 billion ahead of its now ill-fated IPO.

The regulators told Ant to rectify unfair competition in its payments business and reduce the balance of its Yu’ebao money-market fund — which at one point was the largest in the world. It also was ordered to break its information monopoly and to minimize the collection and use of personal data and to stop any illegal credit, insurance and wealth-management activities.

In a statement on its official WeChat social media account, Ant said, “Under the guidance of financial regulators, Ant Group will spare no effort in implementing the rectification plan, ensuring that the operation and growth of our financial-related businesses are fully compliant.”

Ant is one of two leading companies in the online payments business in China, the other being rival Tencent. The company says more than 1 billion people use its Alipay service, which offers a slew of functions including bill payments, purchases online and offline and money transfers.

In January, China proposed draft rules to curb monopolies in the online payments market. Any non-bank company with half of the market in online transactions or two companies with a combined two-thirds market share could be subject to antitrust probes.

As of the first quarter of 2020, Tencent and Ant Group had a combined market share of more than 90%, with Ant taking 55.4% of the market and Tencent 38.8%, according to data from market research firm iResearch.

The new guidelines for Ant’s overhaul come days after Alibaba was fined $2.8 billion following an antitrust probe into the company founded by billionaire Jack Ma.

Alibaba’s stock price rose 6.5% in Hong Kong on Monday.


HONG KONG (AP) — By ZEN SOO

Continue Reading

News

Alibaba fined $2.8 billion on competition charge in China

Associated Press

Published

 on

Alibaba

Alibaba Group, the world’s biggest e-commerce company, was fined 18.3 billion yuan ($2.8 billion) by Chinese regulators on Saturday for anti-competitive tactics, as the ruling Communist Party tightens control over fast-growing tech industries.

Party leaders worry about the dominance of China’s biggest internet companies, which are expanding into finance, health services and other sensitive areas. The party says anti-monopoly enforcement, especially in tech, is a priority this year.

Alibaba was fined for “abusing its dominant position” to limit competition by retailers that use its platforms and hindering “free circulation” of goods, the State Administration for Market Regulation announced. It said the fine was equal to 4% of its total 2019 sales of 455.712 billion yuan ($69.5 billion).

“Alibaba accepts the penalty with sincerity and will ensure its compliance with determination,” the company said in a statement. It promised to “operate in accordance with the law with utmost diligence.”

The move is a new setback for Alibaba and its billionaire founder, Jack Ma, following a November decision by regulators to suspend the stock market debut of Ant Group, a finance platform spun off from the e-commerce giant. It would have been the world’s biggest initial public stock offering last year.

Ma, one of China’s richest and most prominent entrepreneurs, disappeared temporarily from public view after criticizing regulators in a November speech. That was followed days later by the Ant Group suspension, though finance specialists said regulators already had been worried Ant lacked adequate financial risk controls.

Alibaba, launched in 1999, operates retail, business-to-business and consumer-to-consumer platforms. It has expanded at a breakneck pace into financial services, film production and other fields.

The government issued anti-monopoly guidelines in February aimed at preventing anti-competitive practices such as exclusive agreements with merchants and use of subsidies to squeeze out competitors.

The next month, 12 companies including Tencent Holdings, which operates games and the popular WeChat messaging service, were fined 500,000 ($77,000) each on charges of failing to disclose previous acquisitions and other deals.

Regulators said in December they were looking into possibly anti-competitive tactics by Alibaba including a policy dubbed “choose one of two,” which requires business partners to avoid dealing with its competitors.

Also in December, regulators announced executives of Alibaba, its main competitor, JD.com, and four other internet companies were summoned to a meeting and warned not to use their market dominance to keep out new competitors.


BEIJING (AP) — By JOE McDONALD

Continue Reading

Trending