2020 has been the year of the special purpose acquisition company, or SPAC. About $80 billion was raised by nearly 240 SPACs in 2020. That's roughly six times the amount raised in 2019.
With so many SPACs to choose from, how can investors decide? To help give you some ideas, Fool.com contributors Matt Frankel, CFP, and Dan Caplinger discussed during this Dec. 22, 2020 Fool Live clip the five SPACs that Frankel recently added to his own stock portfolio.
Matthew Frankel: So, I own shares of five different SPACs that I'm allowed to talk about. So the first three I might kick to you and those are Chamath's IPOD [Social Capital Hedosophia IV] (NYSE:IPOD), IPOE [Social Capital Hedosophia V] (NYSE:IPOE), and IPOF [Social Capital Hedosophia VI] (NYSE:IPOF). I can briefly just mention the difference between them. They are three SPACs. The biggest difference is the stock price. IPOD is $400 million in size, IPOE is $700 million in size, and IPOF is a billion-dollar SPAC. So why do we like these so much? Why are these trading at such a premium? What can you tell us about these?
Dan Caplinger: Well, basically, you were talking about management quality and that Chamath Palihapitiya is quality personified in terms of this. He has really been a big push in the SPAC world for technology companies. He wants to give an alternative method for tech companies coming public other than the IPO process, which he sees as being really problematic. I was lucky enough to get to talk with Vivek Garipalli, who is the CEO-Founder of Clover Health, which is the SPAC acquisition target for IPOC [Social Capital Hedosophia III] (NYSE:IPOC), which was third SPAC vehicle there. Vivek explained to me that one of the benefits of the SPAC process, especially with Chamath was that the process looks a lot more like what privately held companies are used to talking about in a venture capital context. Nobody expects start-up companies to have much in the way of past financial results. It's all based on growth, future growth prospects. The traditional IPO process has some trouble with that. That's part of why you see so many companies, especially in the tech industry wait so long before they come public in a general IPO is because they need time to generate the growth, backward looking growth that will demonstrate to Wall Street traditional IPO folks what the deal is. So it's because the company behind those IPOD, E and F, Social Capital Hedosophia has such a good track record. They've got their IPOA turned into Virgin Galactic (NYSE:SPCE). Their IPOB just started trading under it's new ticker symbol, OPEN, Opendoor Technologies (NASDAQ:OPEN). The online real estate folks that I'm sure, Matt, you could go into great detail about. IPOC is setup to be Clover Health, a health insurance, Medicare, supplemental, and also a healthcare information tracking system company in play. But we have a lot of confidence that whoever ends up being the companies for IPOD, E, and F are going to have similarly interesting philosophies. I think that's why the market is trading them at a premium to that $10 share price. We have one question I got to scroll down to, why does IPOA still trade as it's own ticker symbol? To my knowledge, it does. I'm not sure. You can sometimes find those symbols before a merger takes place, before the name change happens. But at some point, those old ticker symbols are going to be out of date, even if they show up on a Yahoo! Finance or something. You might notice they aren't updating the quotes anymore, you got to go to the new ticker symbol for that. So don't get confused by that.
Frankel: It might be showing up with zero volume. A couple of the things to clarify about the IPOD, E, and F, IPOD trades at the biggest premium. It's not necessarily because that one will get a deal first. They are not necessarily going to happen in order. IPOF could get a deal before IPOD and E. The primary reason in my opinion, that they're trading for at the price they are is supply and demand. IPOD is a smaller SPAC, IPOE is slightly larger, and IPOF is slightly larger than that. So when an investor decides to buy all three like I did, I put roughly the same amount of money in all three, there's a lower supply of IPOD, little more supply of IPOE. So when investors buy at supply and demand dynamics are what's causing that price action. It's not necessarily that IPOD is going to go first. That's not the case. There is no rule that says that one has to be first. In fact, in their S-1 filing, it specifically says that IPOE and IPOF are going to competing against that fields. So that's something that's important to know. Another one that I recently bought in my own portfolio is Starboard Value Acquisition (NASDAQ:SVAC). If you are familiar with the Starboard Value Fund, they are one of the most successful activists investors of all time. Their ticker symbol for their stock is SVAC by the way. They are one of the most successful value investors of all-time, most successful activities. Eighty four percent of their activist campaigns have made money, which is a pretty impressive statistic. I bought them not just because of their track record but because their investment style fits my investment style. They are value investors, they are not looking for the next big Moonshot tech play. They are fundamental analysts. Their board members are Harvard business school faculty member, Columbia business professor, who are really like crunch the numbers and find a great value investment. Starboard Value has just a fantastic track record, a management team I would bet on over and over again and this is their first SPAC. So I'm really excited to see what they can do with it. I also bought a little bit of the Pershing Square SPAC [Pershing Square Tontine Holdings] (NYSE:PSTH), ticker symbol is PSTH. It's the only one I know of that doesn't have a $10 per value for their shares when they first started. It's the biggest stock in history. I know Dan knows a little bit about this one. It's a $4 billion-dollar SPAC. What are the advantages of it being so big? Is that an advantage or disadvantage?
Caplinger: Interesting question. Because the size of the SPAC component. Basically how these deals end up going down is that you buy a company that's generally bigger than what the SPAC has available. Where the extra funding comes from, usually the company itself only wants to sell a portion of itself, it doesn't want to sell the entire amount, insiders want to hang onto their shares, early venture capital folks don't want to cash out just yet necessarily, and so the SPAC is only buying a certain percentage. In addition, usually the SPAC has relationships with institutional investors, the deal is called PIPE financing, Private Investment in Public Equity, I think is what that stands for. Basically, it adds money into the deal so that the privately held company gets the amount of cash that they're targeting, even if that amount of cash is different from what the SPAC has on hand. That's what's going on behind the scenes as far as how that ends up working.
Frankel: I'm curious to see what their acquisition target is going to be.
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