Wall Street Thinks Most SPACs are a Joke
by Douglas Messier
Managing Editor
Over at Fast Company, William D. Cohan says professional investors and financial analysts have a low opinion of the special purpose acquisition companies (SPACs), which are being used by Virgin Galactic and six other space companies to go public. (SPACs are an inside joke on Wall Street, and the joke is on you)
SPACs are investment vehicles that are already publicly traded on the stock exchange. Their goal is to acquire or merge with other companies, which then go public under their own names.
Cohan writes:
The financial press has responded with astonishment and alarm: Andrew Ross Sorkin, the business columnist at The New York Times and CNBC anchor, wrote a column decrying SPAC excess as “rife with misaligned incentives between the sponsor and other investors, particularly those who come after a merger.” He also repeated a bad joke making the rounds on Squawk Box that more people on Wall Street have SPACs than have COVID-19—and Bloomberg Opinion recently ran a series of columns devoted to the froth in the SPAC market.
Perhaps more important, the sirens are ringing among Wall Street practitioners too. One senior banker tells me that SPAC bankers have become infected with Masters of the Universe Syndrome—think junk bonds in 1987, the dot-com bubble in 2000, or mortgage-backed securities in 2008—and he worries the market will crash and burn in similarly spectacular fashion. “Trouble is coming,” he says.
Even David Solomon, the CEO of Goldman Sachs, which was the third-largest underwriter of SPACs in 2020 (and is the second largest so far in 2021), has spoken publicly about the dangers of the new hot asset class. In January, Solomon wondered if SPAC issuance had “gone too far” and said he didn’t think such issuance “was sustainable” in the medium term. The ecosystem, he added, “is not without flaws.” In an interview with Yahoo News, no less a respected investor than Charlie Munger—Warren Buffett’s longtime sidekick—criticized the proliferation of SPACs in unusually colorful language: “The investment banking profession will sell shit as long as shit can be sold.”
Virgin Galactic became the first space company to go public via a SPAC in October 2019. Rocket Lab, Momentus, Spire Global, Astra Space, AST & Science and BlackSky have announced plans to go SPAC over the past year. None of these deals has closed yet.
Cohan wrote that SPACs are structured in ways that can encourage them to acquire immature companies that are not ready to go public. A SPAC’s sponsors pay millions of dollars in non-refundable fees to bankers, lawyers and accountants to raise money to fund the acquisition or merger.
There is a two-year time limit for a SPAC to complete a merger or acquisition. If it can’t do so, the SPAC returns money to the investors and goes out of business. The sponsors do not get back the millions in fees they paid to raise the investment capital.
Scott Galloway, a NYU business-school professor quoted in the article, praised Virgin Galactic’s merger with Social Capital Hedosophia, which was established by billionaire Chamath Palihapitiya.
“Occasionally a walk-on ends up being a great player,” he says. Virgin Galactic, which merged with one of Palihapitiya’s SPACs in October 2019, has practically sextupled in value since.
Well, it had almost sextupled in value since opening at $11.79. The stock hit a high of $60.82 on Feb. 11. Since then, the stock has been in free fall due to additional delays in testing the company’s SpaceShipTwo suborbital rocket plane, Virgin Galactic’s large losses, and a lack of revenue. The stock is currently trading at $28.34.
Stocks go up and down; Virgin Galactic’s shares will likely soar when the company starts flying again. But, it’s a sign of how much trading on Wall Street is based on expectations and hope that Galloway can declare a SPAC deal to be successful because the stock price has increased, not because of anything the company has actually done.
It’s been two years since SpaceShipTwo VSS Unity‘s last powered flight. During that time, the company has conducted two glide flights. A powered suborbital flight test was aborted in December due to a technical problem. The company delayed a suborbital test scheduled for February until May because engineers had still not fully addressed the problem that cropped up in December.
In the 16 months since Virgin Galactic went public, its schedule for the start of commercial space tourism flights has slipped 18 months from June 2020 to early 2022. It’s yet another delay in the SpaceShipTwo program, which was originally supposed to carry space tourists 15 years ago in 2007.
Virgin Galactic had a net loss of $272 million in 2020. The company had zero revenues in the fourth quarter. Significant revenues are not expected until next year.
Virgin Galactic CEO Michael Colglazier has bold plans for the company. He envisions SpaceShipTwo vehicles flying from multiple spaceports around the world. Each spaceport would host 400 suborbital flights per year and generate $1 billion in revenues in ticket sales and ancillary revenues.
However, it’s not at all clear whether SpaceShipTwo and WhiteKnightTwo carrier aircraft are robust enough to support that kind of a flight rate. Nor has Calglazier made clear how long it will take to reach those numbers if it is possible.
While the stock has been taking a beating as of late, insiders have taken advantage of its rise to cash out. On Friday, it was announced that Palihapitiya, who serves as Virgin Galactic’s chairman, had sold his entire personal stake in the for about $213 million. In December, he sold nearly $98 million in personal shares. Palihapitiya’s personal investment when Virgin Galactic went public was $100 million.
Palihapitiya said he needed the $311 million for a new venture focused on battling global warming. He said he remains fully committed to Virgin Galactic. Palihapitiya continues to indirectly own a stake in the company through Social Capital Hedosophia.
Last year, Virgin Galactic Founder Richard Branson sold hundreds of millions of dollars in Virgin Galactic share. He has said the money helped to rescue his travel-focused Virgin Group, whose airlines and hotels have been hard hit by the global COVID-19 pandemic.
5 responses to “Wall Street Thinks Most SPACs are a Joke”
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Yes these SPACs are a joke and these firms will just further erode the image of space commerce among investors. But then the folks that run these firms don’t really have that strong a background in economics or business. Elon Musk is the exception having earned a Bachelors in Economics from Wharton and having worked for a bank. Same for Jeff Bezos who has experience in banking.
SPACs are not a joke. My reading of them is that they are a market-based response to the dramatic fall-off in traditional IPOs since the passage of the Sarbanes-Oxley Act. Sarb-Ox was intended to prevent more Enrons. But what it has mostly prevented are a huge number of potential IPOs by, in effect, imposing a steep tax on going public.
VG is not a joke because it was the first space company to go public via SPAC, but because it was a joke well before it did so. Every space company that has indicated intent to SPAC-ify itself into the public markets since has been a far more promising candidate for long-term success than VG. Rocket Lab, BlackSky and Spire have had operational space hardware working for years and have generated solid revenues. Astra and Momentus have demonstrated technology and may book initial revenue before year’s end. Both have sizable manifests of future business already booked.
The people running NewSpace companies that are getting attention for going public via SPACs have a lot of business experience. Some of them may even have academic business credentials – not that that’s really important. The fabled fortunes of Silicon Valley certainly were not amassed by people with MBAs. Most of the embryonic and future fortunes amassed in various space businesses will also be the work of founders sans-MBAs.
They’re just a product of very cheap investment funding. It’s good in some ways – it means stuff that would normally be too speculative to get large amounts of funding (such as most space startups) are getting it. Plus the usual IPO involves handing off a lot of money to a bank in order to get a “pop” when the stock goes public, and these companies don’t need it.
That company is doomed if SpaceX gets Starship to work properly by 2022 or 2023. They haven’t said as such, but given that Starship should be capable of suborbital fights by itself I wouldn’t be surprised if SpaceX does a bunch of those for tourist reasons to fill out their launch schedule. That will just steal the market right out from under them.
Watching SPCE unfold, what’s really struck me is now how much of a joke it is — a very big one — but how much of a joke Wall Street itself is. There are plenty of analysists giving SPCE a “buy” or “strong buy” rating. This is astonishing to me. In the past I’ve mostly been annoyed with analysist who focus solely on past revenue, unable to forecast how technology or market conditions or other factors might influence future revenue. But somehow, with SPCE, past revenue is irrelevant — and so is technology (dodgey), market size (trivial), competition (highly credible), management (terrible), company history (grim). etc.
The fact that the general public is buying this is one thing , but for professional investors and analysts to jump on this bandwagon really lowers my opinion of them. They’ll be badly burned. And then, yes, they’ll probably turn around and make blanket assertions that space SPACs are a joke — which is a real shame, because Rocketlab definitely isn’t a joke, and as far as I can tell, neither is Astra. (I know less about the rest). So where Virgin is over-valued by the market, because the market is apparently run by idiots, far more substantial companies are likely to be undervalued by it, for exactly the same reason.
Hopefully I’m being pessimistic, and these new entrants will get the respect they deserve.
I wouldn’t agree with you that Wall Street is a joke because one can become wealthy through prudent investing. The best attitude to have is to regard a brokerage account as a long-term wealth-building agenda and not as a get-rich-quick scheme.
“The investment banking profession will sell sh it as long as sh it can be sold.” That’s the truth. They aren’t idiots, it’s the fact that the broker doesn’t care about you but about their cut – so I’d give a whole lot more weight to the info revealed in reading a single one of Peter Beck’s statements about Rocket Lab than a hundred of the so-called analysts’ reports.