Why Aren't More Companies Using SPACs for Their IPOs?

The IPO market hasn't really slowed down much, but the volume of companies choosing to go public via SPAC (special purpose acquisition company) mergers certainly has. In this Fool Live video clip, recorded on June 28, Fool.com contributors Matt Frankel, CFP and Lou Whiteman discuss why we're not seeing more companies choosing the SPAC route anymore. 

Lou Whiteman: This is kind of a flipped story, but it has guided me through the whole SPAC thing, way back when Palantir (PLTR 2.44%) was going public last fall, the defense IT data analytics company.

Matt Frankel: The one that no one really knows what they do.

Whiteman: Yeah, it's a fight club thing. But I was talking to a banker friend that I remain close to, and we're talking about that as it gets just to make small talk, I said, "Yeah, it's funny they're not doing a SPAC." The banker who does a lot of IPO work just laughed and said, "No, yeah, of course not, they don't have to." That was the prevailing wisdom that these SPACs were just companies, they had to. I know it's played out in the industrials with electric cars, with some of them, the value of forward projections versus past, I don't think it's as true. It's turned in with the industrials, it's a guidepost for me, not good business, bad business, but as far as we're likely to see a short seller, we're likely to see push-back, we're likely to see hiccups. Is it as true among the financials? It seems like some of the financials that are using it, there's a lot more meat there, and it's not what we've seen with electric vehicles and some of those.

Frankel: It depends who the sponsor is. Cyxtera, the one I just mentioned is Starboard Value SPAC (SVAC). They're a deep value investor, they're not going to invest in some silly growth story. They're not going to invest in made-up projections, like Cyxtera is projecting a growth rate and the team is going forward, nothing crazy. It's just a long-tail plan on data centers. They're already a profitable business, that's a word you don't hear a lot in the SPAC market, you're very correct. It depends. Payoneer (PAYO 1.02%) is one they just went public today actually through its SPAC merger. They just started trading under their own ticker symbol. More of an up-and-coming one, more of, let's say, generous projections that they make. If you look at some of these electric vehicle SPACs, they're projecting revenue is going to be up 300 percent per year for the next five years.

Whiteman: They're all going to be the biggest company in the history of the industry.

Frankel: That's something you can't get away with with an IPO or direct listing. You can't get away with nonsense projections like that in a lot of case, not that Payoneer is making those, I actually am a big fan of that company. But in a lot of the EV start-ups, especially you'll see these very generous projections. Like we're going to ramp up production from zero today to 100,000 vehicles a year in 2025. It's probably not going to happen, and that's something you can't get away with through the traditional route. But having said that, a lot of companies that have chosen this SPAC route could have done IPOs. 23andMe (ME -4.66%) is one that just recently went public. They probably could successfully completed an IPO. They couldn't do a direct listing because in a direct listing you don't raise any new capital and that's what they needed, but you generally raise a lot more in a SPAC merger than you would with just the traditional IPO, especially for some of these early stage companies. There's no way Lucid would've raised over $4 billion at an IPO, for example, they would've raised something, but it wouldn't be anything near what they got in their SPAC merger. 23andMe got $750 million, that wouldn't have happened in an IPO, they're just not that big of a company. There are benefits to SPAC mergers. I've said before in this show, and then I'll shut up after this, that I think of SPACs like a class. This is the SPAC class of 2021. Like any class, you have the top 5% that's going to go to Ivy League schools, and then, in this particular class, you have at the bottom 75%that you probably don't want to invest in. I try to think of it in that context, and most of the EV stocks were in the lower end.

Whiteman: It may be a case where the SPACs we've moved from because we have to, where that is just the route they had to take to now that there's so many of these things, and I know it's been talked about on here that there's a lot of money searching for a home. Maybe we're in phase two of this where better businesses are attracted to it just because of like you say, the payouts you can get. Maybe it's time to change the filter. Last year it seemed like a lot of companies were using it.

Frankel: Yeah.

Whiteman: Maybe we're getting higher-quality businesses just attracted by competition for a good business.

Frankel: Better was actually a pretty recent SPAC announcement. They have a very real business with real revenue and real growth that they can show. I think you're right there, the sexy but not profitable and not really revenue-generating growth companies. Maybe we worked through those already, I mean, the SPAC market has clearly slowed down tremendously. I remember there was one show we did in, I think March, where 23 SPACs went public the day we were doing the show, and that's not happening anymore. I don't know if any new SPACs are going public, I'd have to imagine there's a couple but not a ton, but there's something like 400 still looking for a target.

Whiteman: That's the thing. You have a lot of quality on that side too, but that is just a lot of pots of money just sitting there looking for homes. If you're a good business now, why not take it out? Especially if you can find a good partner.