Why Blank Check Companies Are The Hottest Thing This Year

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, you've heard of SPACs, right?

Joe Weisenthal (0:21)

Yeah, absolutely, I've heard of them. I've heard about them for a while, so-called blank check companies, but they've definitely been one of the big stories of 2020, especially in the last couple months.

Tracy Alloway (0:34)

Right, and for those that don't know, SPAC stands for Special Purpose Acquisition Company, and they're basically these blank check firms, shell companies, that set out to buy other companies and make money off of them, and it's a way for people to get involved with those companies without the companies actually having to IPO in the public market.

Joe Weisenthal (0:59)

Right, and the interesting thing is that the SPAC is public right away, so the SPAC does the IPO, it trades. And so of course, there's always a lot of, there's venture capital and there's private equity, there's always companies that are financial companies that are buying other companies, but this is a situation in which the buyer, the shell goes public, it raises money in that offering, and then it goes out in search of an actual real business to buy.

Tracy Alloway (1:29)

Right, so you're sort of pre-funding acquisitions and you don't know what they are going to be exactly. Now, the funny thing about SPACs is like, I don't remember that much about them before 2008 I don't know why, but apparently that was the last time that everyone was talking about SPACs, right?

Joe Weisenthal (1:48)

Well, I think that's right. And I think that they do historically have this reputation because of, you know, when you hear like blank check company, you hear like blank check that typically doesn't have like historically great connotations in anything, but you hear like blank check company, and it's like, wait, I'm handing money over to this company, and I have no idea what they're gonna do with it, except that I hope they're gonna make a good acquisition.

So historically, I think they have sort of a questionable reputation, although part of our discussion today is that changing, but it also tends to be the case that they're associated with periods of, you know, boom, speculative periods. And so you mentioned pre-crisis period, last crisis, and of course you mentioned now, and, you know, historically, they do seem to be associated with periods of a speculative appetite, shall we say.

Tracy Alloway (2:41)

Yeah, exactly. I mean, the term blank check company kind of screams too much money in the system, doesn't it?

But you're exactly right. That's the big debate now. We saw lots of SPACs before the 2008 financial crisis kind of kicked the air out of the market's tires, and now SPACs are coming back. I think so far in 2020, we've had over 65 deals for something like $24 billion. Everyone's talking about them. There's all types of different structures. Some are more controversial than others. But the big question is, is this a sign of some sort of excess in the market? Are we actually protecting investors through these structures, or is this a way to funnel money to sponsors or corporate owners?

So today, we are going to dig into all of those questions. And I'm really excited to say we have Kelly Driscoll. She's a board director at a SPAC called Fusion Acquisition Corp.

She's also a longtime executive over at State Street Global Advisors. So we're really happy to have her on. Kelly, welcome to Odd Lots.

Kelly Driscoll (3:51)

Thank you. It's a pleasure to be here with you today.

Tracy Alloway (3:54)

So Kelly, maybe just to begin with, could we maybe discuss why SPACs are experiencing this resurgence now? Why now at this moment?

Kelly Driscoll (4:07)

Sure, I think the big why now is the volatility in the market. So certainly with the coronavirus and here in the US, the uncertainty around the upcoming elections, there's incredible volatility, which tends to be, puts a damper on traditional IPOs with that much volatility. And so SPACs are an alternative to IPOs. It's a way for private companies to basically go public by being acquired, as Joe had mentioned, by a SPAC that is already publicly traded.

And to kind of go back to some of the comments that you made on the evolution, you're absolutely right that one of the reasons they, you maybe haven't heard of them since the early 2000s is because that's when they received a lot of mixed reactions and had some mixed reputations in the marketplace. But there were some regulatory and listing changes in 2011 The regulations made it easier to approve acquisitions because the acquisitions in the end have to be approved by the shareholders of the SPAC.