and Chris Bryant
Bill Ackman’s decision to return $4 billion to investors rather than execute a controversial SPAC deal shows remarkable calm. But it’s unlikely to keep the risk-takers flocking to Pershing Square Tontine (better known as PSTH). Not only did it fail to put together an impressive correlation, but non-academic investors burned to bet on PSTH hoping it would. Ackman offers them a consolation prize: it is not yet clear how sustainable and valuable that prize is.
Ackman is not the first SPAC manager to recognize that “empty cash” companies have reached a limit, but as PSTH was the largest ever created it still represents a bad move for this asset class.
More than six “blank check” companies have liquidated so far in 2022, according to SPAC Research data, and I expect many more to close in the coming months. The Securities and Exchange Commission (SEC) has made banks reluctant to merge, and shareholders are increasingly asking for their money back instead of funding deals. Many of these “missile companies” are also running against their two-year deadline to complete the program.
Ironically, Ackman’s car company was lucky, as he discovered early on many of the problems that have proven to be the demise of SPACs, namely the perverse incentives of managers and the tendency of investors to take their money.
Launched in July 2020, PSTH sought to correct this distortion—Ackman rejected the free shares that SPAC founders award themselves and offered additional collateral to shareholders who agreed not to give up their money. And yet, PSTH ended up being demolished by the same negative protests as other SPACs.
The deal it wanted to make with Universal Music Group NV last year was rejected by the SEC. This caused great frustration among retail investors who felt they were missing out on a great opportunity (Universal Music made a deal with Ackman’s hedge fund). The failure was also used to make PSTH the target of a (baseless in my view) shareholder suit that claimed it was an illegal investment company, which PSTH has denied.
The upshot of all this drama is that PSTH shareholders who bought it at its IPO price will get their money back later this month, plus interest. It’s not such a bad ending when you consider what some SPACs lose to their shareholders in ill-conceived deals. The performance index of SPACs that have completed their mergers has fallen by more than 75% in the past year. Unfortunately, many small investors unwisely bought PSTH at a premium of $20 per share. Those who entered PSTH derivatives (options or warrants) will have lost even more.
But they will not be left empty-handed. Ackman gives them rights, called SPARs, to participate in an unspecified future plan. In theory, Pershing Square SPARC Holdings is an improvement on the typical “blank check” company. Investors won’t have to park money at a lower rate of return until SPARC acquires a target company, which could take years. Instead, they’ll be prompted to opt-in as soon as Ackman finds something to buy. Therefore, SPARC saves issuance fees (about 7% for a traditional IPO and 5.5% for a SPAC).
IPOs are dying and the SPAC’s reputation is tarnished, so a company looking to go public may find the business price security that an SPRC offers very attractive. PSTH’s stock derivatives are set to expire worthless, so the fact that they are trading above $0 suggests that investors continue to have faith in Ackman’s trading ability.
But SPARs need to get the SEC’s “blessing” and, at least initially, will trade over the counter instead of Wall Street. This can reduce their prices and liquidity.
It will not be easy to convince the “unicorn” company to bet on the innovative IPO structure, and investors who “bled” with Ackman’s financial innovations will be doubly reluctant. Only if he gives them a “juicy” plan will he get their forgiveness.