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SPACs: Why Are They On Fire Right Now?

By Taylor Carmichael - Mar 12, 2021 at 9:00AM

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More and more tech companies are avoiding the IPO and using a SPAC to come public. What's going on?

Right now there's a major shift happening in how many private companies open themselves to public investment. More and more tech companies are abandoning the initial public offering (IPO) model in favor of merging with a special purpose acquisition company (SPAC) instead. In this segment, Corinne Cardina, the bureau chief of healthcare and cannabis for The Motley Fool, and Fool.com contributor Taylor Carmichael discuss the SPAC revolution and how investors can profit from this new model. This segment was recorded live on March 5.

Corinne Cardina: Taylor, let's talk about SPAC stocks. That's another theme that has started emerging 2020. It's not huge in healthcare, but we are seeing some interesting examples. Obviously, it's been really big in tech. Certainly, Clover Health (CLOV -1.44%) with the hot healthcare SPAC, but there are a couple of other ones coming up. Can you tell us a little bit about what healthcare investors should know about SPAC and what is a SPAC.

Taylor Carmichael: Oh, yeah. Well, a SPAC is a special purpose acquisition company. It's not so new, but it's become a lot more popular. It's a new way to come public other than an IPO. In my opinion, Silicon Valley and tech stocks in general are really unhappy with the IPO process, because they feel like a lot of money is being left on the table. The bankers value a company at a billion or two billion or whatever they do. Then on the first trade, the valuation is suddenly four billion and the company didn't see any of that money, so they feel like they've left a billion or two billion on the table and the banks, and the banker clients are enriching themselves. The last one is a Snowflake (SNOW -3.63%) IPO, which came out three times, it was three times in valuation between what the bankers said the company was worth and what they valued it at and the first trade, so that's dramatic. I saw estimates today, left like two or three billion dollars on the table. What we're seeing is this huge wave of companies coming public via another method, which is the SPAC method. A special purpose acquisition company is what they call a blank check and a bunch of people invest a little bit of money, a billionaire often invests a lot of money. They create this blank check company and it has no commitments. When it's that early, I would suggest you don't bother with it. You just wait until they make a deal with a private company. Because once they make a deal with a private company, then that private company's going to come public and it's different than the (IPO) because it's going to come public at a lower valuation. The company still gets a lot of money from the deal. But typically, the stock has a lower market cap when it hits the public markets. You can find and there's been no hype, there's no roadshow, there's none of that usual IPO hype stuff. If you like investing, if you like researching stocks, or finding unknown stocks, I would highly suggest, take a look at SPAC. There's this website called SPAC Track and you can track the various ones and there are some really interesting companies...

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Stocks Mentioned

Clover Health Investments, Corp. Stock Quote
Clover Health Investments, Corp.
CLOV
$2.74 (-1.44%) $0.04
Snowflake Inc. Stock Quote
Snowflake Inc.
SNOW
$141.49 (-3.63%) $-5.33

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