SUSPEND YOUR disbelief. That seems to be what modern financial markets require of investors. GameStop, a tiny and humble retailer that was swept up in an online-trading mania earlier this year, is still worth $11bn. Digital animations are being sold through online tokens for millions of dollars. The stock of Dogecoin, a digital currency that was until recently considered to be a parody, is valued at almost $50bn. Crypto, meme-stocks, NFTs—each new financial fashion seems to bring its own termi-nology and the whiff of absurdity.
Many investors would add to that list special-purpose acquisition companies (SPACs). They are an alternative way of taking firms public that bypasses the cumbersome initial public offering (IPO) process. The pace of deals has been furious. Between January and April some $100bn was raised through SPACs, many of which are now hunting for firms to buy. Some 84 companies have announced they will float via SPAC mergers so far in 2021, versus 123 using IPOs. The SPAC trend is a giant experiment with a different way to take firms public. And it is also a test of the firms involved, most of which have either been hidden away in private markets for years, or are so nascent that they are more concepts than companies.
So just how mad is the SPAC frenzy? At first glance, pretty mad. This boom has occurred in spite of the dodgy track record of some firms that have gone public in this way in the past. Regulators grumble that the process is easy to manipulate. The executives who run SPACs frequently take a whopping slice of equity for themselves, to the detriment of the outside investors who usually stump up far more cash. Often they make fanciful promises. The Economist has totted up the management forecasts of a panel of 50 recent or pending SPAC deals. Around half of the firms are loss-making. In aggregate the 50 firms generate about $1bn of annual gross operating profits today but have forecast to investors that this will rise to a miraculous $15bn by 2023. There are pockets of extreme delusion. Of the eight electric-vehicle (EV) firms ushered into public markets by SPACs in 2020, five expect to progress from making no revenues to $10bn-worth in under five years. Not even Google, one of the most successful firms in history, pulled that off. It took it eight years.
Yet while the overall figures look wild, the good news is that the SPAC boom is becoming more discerning. The market capitalisation of Virgin Galactic, a space-technology company, has fallen from $13bn to $5bn since February. Shares in Opendoor, a real-estate firm, have halved. Investors who funded the VectoIQ Acquisition corporation saw their money grow seven-fold after it merged with Nikola, an electric-truck maker, in June 2020. But shares in the…
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