The crisis creates an opportunity, but not for everyone: summing up the boom of IPO and SPAC…
The crisis that unfolded during the coronavirus period in the first half of 2020 forced the Fed to cut interest rates to near zero. Borrowing costs have fallen, and many companies have rushed to IPO and go public. In an era when interest rates are at their lowest, the stock market becomes the only way to save and increase capital.
Who made money on this?
The largest investment banks and underwriters, who were engaged in placement, turned out to be in unequivocal plus. Part of the funds that were raised during the initial public offering of the company was left for its own development or for the development of competitiveness.
However, there were also those who made money after the placement, selling their shares after some time against the general background of a growing market.
Who lost on this?
If we look at examples of IPOs, almost all are now trading lower than they were when they went public.
Data storage company Snowflake, for example, went public with a $3.4 billion valuation, and the price doubled during the listing. Or AirBNB, which raised $3.5 billion, also doubled in value. Now the shares of Snowflake and AirBNB are trading 43% and 19% less than their starting values, and those who reached the peak on time made money, and those who continued to play in long-term investments lost.
And finally, the saddest example: the IPO of the largest cryptocurrency exchange Coinbase made a lot of noise. Almost a year ago, in April 2021, Bitcoin was trading at its all-time highs, and on the first day of trading, the starting price of one Coinbase share was $320, but it never returned to these peaks. Now the result after placement is -77%.
What about SPAC, and how is it different from IPO?
SPAC stands for Special-purpose Acquisition Company. Such a SPAC buys a private company through direct investment, that is, pools the funds of investors and makes the private company public, bypassing the IPO procedure.
One of the differences from conventional IPOs is that SPACs publish financial projections. They tend to be overly optimistic and are often used to justify fanciful estimates. Sometimes financial targets are canceled shortly after the company has gone public.
Another big difference is that when SPAC chooses a target, investment banks are hired to accompany them and provide financial advice. Their job was to confirm everything written in the merger prospectus, including the often rosy predictions.
Financial institutions have until recently been happy to conduct ad-hoc M&A deals because they were paid generous commissions to help them find companies to take over. The paradox was that investment banks did not bear any responsibility for the “quality” of these acquisitions, so there was a clear conflict of interest.
Now, the Securities and Exchange Commission (SEC) has decided to cool their ardor and wants banks to also vouch for the information contained in merger prospectuses. This will increase the protection of investors and put them on an equal footing with other market participants. At the same time, this will entail a great legal responsibility. After such regulatory measures, SPAC, as a way to enter the stock exchange, will be an overly complicated and expensive method, because without special support from investment banks, it is unlikely that a company will be able to go public in this way.
On the other hand, the actions of the SEC could lead to the demise of the SPAC, which can be seen as over-regulation of the “better to ban than to explain” type.
However, while SPACs have many disadvantages, prior to this form of investment, public markets were shrinking for years and retail investors were unable to invest in startups. Now the further distribution of SPAC remains in question. To ban — they will not ban, but they will obviously put spokes in the wheels.
What can be learned from this?
The IPO market quickly caught fire and quickly went out, successfully falling into a combination of circumstances: low rates, the development of IT technologies, which have nothing to do with coronavirus restrictions. However, as practice shows, it is extremely difficult to beat the companies of the “old economy” or just the broad market, especially if you act on a wave of emotions and hype.
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