Monday 15 April 2013

SPAC's: Boon or Bane? (2)

I wrote before about SPAC's (Special Purpose Acquisition Companies).

I received two comments:

The first, anonymous, person commented that the Securities Commission had provided lots of safeguards in the process (money with a trustee, earning interest, investments have to be approved, if no investments in 3 years money will be returned, etc.).

I agree with those points, but that was not the reason why I wrote the posting. It had to do with the managers having their cake and eating it, and higher (industry) risks down the road, both the energy and mining business are pretty difficult businesses.

The second person, "Shadow" wrote:

"Alternatively investors can invest directly into a number of junior resources companies usually found in ASX or Toronto. The risk profile and business model of such companies are very similar to SPAC with 2 major distinctions - 1) the underlying assets are known; 2) investors do not need to cede a big premium of 15%-20% of the shareholdings to management.

For investment into resources company, the devil is in the details when it comes to assessing a company's outlook. In the case of SPAC, there is nothing to assess but the management's credibility. Personally, i wont know how to assess the management of any of these companies. This is definitely a case of buyers beware!"

I agree with these observations,  SPAC's can indeed be compared to "juniors", which are notoriously volatile. Some of them have taken of spectacularly, but most haven't, in the contrary. They are definitely not investments for widows and orphans.

Why are the called "juniors"?Take for example the SPAC's listed on Bursa, their size is around RM 600 Million. A company like Royal Dutch Shell has a market cap of about 1,000 times larger, RM 600 Billion!

Being so small has distinct disadvantages (it will lose in any bidding war, if it has exceptional employees then they might be hired away, RDS has its own distribution channels, etc.) but also some advantages (it can go for business that is simply too small scale for the big players).

Today in The Malaysian Insider a critical article about SPAC's: "Blank cheque IPOs bring hope and caution to Malaysia" written by Reuters. Some snippets:
  • Malaysia’s bull market is seeing a type of initial public offering, still fairly new to Asia, that takes a special kind of company public: one with no profits, revenues or assets.
  • “If the historical experience in the US is any indication, it should provide a warning sign that these investments may not turn out to be particularly good ones,” said Stefan Lewellen, a SPAC expert who authored a study on US SPACs at Yale University.
  • In the United States, there is a long line of examples where such companies failed to make an acquisition and were forced to delist. Even those that did make a deal, on the whole, have not historically performed well.
  • Lewellen’s research showed that US SPACs with completed acquisitions between 2003 and 2008 posted negative returns in excess of 36.5 per cent a year.
  • “SPACs were popular in the US and now are sort of dead,” said an equity capital markets banker in Hong Kong, who was not authorised to speak publicly on the matter. “I’m very sceptical on SPACs. It’s risky, it’s illiquid. It’s a very difficult product to become mainstream.”
  • After a spurt of listings and a surge in prices in 2010, SPAC issuance in South Korea ground to a halt as prices crashed and companies delisted. Daewoo Securities Green Korea SPAC and Mirae Asset No. 1 SPAC, the first two listed, were among companies that surfed on the retail investor frenzy and nearly doubled in price within weeks of their IPOs.
  • "Those kinds of stock bubbles were caused by ... financial illiteracy of individual investors,” said Kab Lae Kim, head of corporate policy at the Korea Capital Market Institute in Seoul and author of a report on SPACs.
  • “In that sense SPACs have lost market confidence.”
Caveat Emptor or Buyer Beware!


  1. I am surprised that none of the strong advocates for SPAC have commented on your latest article.

    At its latest price, Cliq, offers at least 10% return based on the residue cash value that investors can get for rejecting the deal on acquisition date. This is equivalent to at least 3% p.a. assuming no acquisition is made by 3rd year but more likely to be yielding 10% return within 6-12 months as management will likely make an acquisition by then. It is essentially a bond with potential equity upside and at its current valuation should be very attractive to investors who are believers of SPAC.

    It effectively embodied all the best protection offers by SPAC. i.e. an assured rate of return with equity linked upside but to my surprise, hardly any promoters is talking about it now. Fundamentally, I will imagine that the stock should be even more attractive for those investors that have participated during its IPO.

    Looking at how Cliq is trading. I think it is not only a case of Buyer Beware but also as importantly a case of Buyer Aware. Investors should make more effort to understand the nature of their investment and not hope to strike gold on the first day of trading, especially on a biz that has no biz.

  2. Thanks for the information, agree.