Wall Street’s New Favorite Deal Trend Has Issues
"Companies are racing to go public via SPAC because the sponsor, unlike an I.P.O., can guarantee them a precise amount of money.
Just as important,
some of those companies could never bear the scrutiny that comes with an I.P.O.
When a company goes public through the traditional I.P.O. process, it must show potential investors its prior financial records. It is not allowed to make projections about its earnings, because regulators have long worried that companies could mislead investors with unrealistic forecasts.
In a SPAC transaction, which is a merger instead of a listing,
companies can publish their financial projections, many of which will prove to be
inflated. Since many companies merging with SPACs have no earnings, this has become a useful feature.
“As a guy who was doing deals in the market in 1999, it feels exactly like it did then,” said Terence Kawaja, the founder and chief executive of Luma Partners, a boutique bank. Mr. Kawaja worked as a banker on the most prominent deal of the dot-com boom: Time Warner’s sale to AOL.
“I worry about the public investors,” he said. “They’re going, ‘I bought this SPAC, and it went up.’ Everyone’s a genius in a rising market.”