FT : Spacs: full throttle
We’ve talked a lot in DD about special purpose acquisition companies and how the boom in blank-cheque listings is upending the traditional initial public offering process.
Private companies usually slog for years preparing for the moment they have the chance to win over investors through a carefully prepared roadshow before taking their shares public through an IPO in which the price is determined by supply and demand.
But Spacs have completely disrupted that routine, particularly for early-stage companies. In some cases, businesses with no revenue (or even functioning products) are finding that all they need to become a publicly traded company is to find a Spac willing to merge with them.
And unlike traditional IPOs, where executives are forced to lay low for fear of getting on the wrong side of regulators, Spacs allow these companies to use what some bankers are calling “regulatory arbitrage”.
The trend has been most apparent in the auto tech sector, where institutional and retail investors eager to find the next Tesla have ploughed in cash. Executives are keen to tap that enthusiasm and ascribe their own companies’ valuations to Tesla’s success. Cue the hype.
An analysis by DD’s Ortenca Aliaj, Sujeet Indap and Miles Kruppa found that the nine auto tech groups that listed via a Spac last year have a combined market value approaching $60bn. Between them, they expect just $139m in revenues for 2020 — a fraction of the valuations.
That success is partially due to the fact that they can woo investors with future projections that to some may seem like a pipe dream. Among the auto tech companies that have gone public this year, few have sold a single product. Some are still in the process of developing a product and inevitably yet to find out whether it’s successful or not.
For example, the nine companies Ortenca, Sujeet and Miles looked at are projecting $26bn in revenue by 2024. That’s a big jump from 2020’s revenues ($139m as stated above).
The ability for a company to tell its own story makes a big difference.
Fisker, an electric car company that went public via an Apollo-backed Spac and has a $4bn valuation, currently has no revenue. But its presentation shows that the start-up expects to go from zero to $10bn in annual revenue in the next three years. That’s with its Fisker Ocean vehicle still two years away from production.
By comparison, Tesla made about $2bn in annual revenue in the three years after it went public in 2010. Though if Elon Musk could’ve disclosed projections for future earnings, DD has a feeling he might’ve had bigger numbers in mind.