SPACs: two very different views

Frequent readers of this blog probably know that I am very sceptical towards SPACs, in general and more specifically in the Malaysian low enforcement environment. Articles can be found here, here and here.

However, I do acknowledge that the SC has tightened the initial rules regarding SPACs and also rejected quite a few SPAC applicants (even with some VIPs involved), so that is definitely good news.

Two articles about SPACs this week, two very different opinions.

To start with Errol Oh wrote "Time to end the SPAC-ulation?" in The Star.

A good, well balanced article I think. I especially like the last two paragraphs:

"There are a lot of ifs and buts about SPACs. That’s not necessarily reason enough to reject them, but if people ignore the uncertainties and are quick to believe just any story about an imminent QA, we may be better off without SPACs.

Executive editor Errol Oh was once intrigued by the idea of SPACs being listed in Malaysia. He may have overestimated the maturity and sophistication of investors here."


Completely different is the article in The Edge Malaysia "SPAC, a new promising investment platform" from Gan Kim Khoon, who we encountered before in this blog article.

Gan's article leans very much towards SPACs in a rather unabashed, positive way. To write in detail what I don't like about it would take too much space, so I will just stick to the main points:

"In introducing new instruments, the intent is to bring variety and vibrancy into financial market activities, while safeguarding investors’ interests and promoting confidence. In that respect, the Special Purpose Acquisition Company (SPAC) instrument introduced by Securities Commission Malaysia (SC) in 2009 is no different from any other financial instruments introduced by SC in the past."

That is quite a statement, as far as I remember Malaysia never listed companies with no track record, no assets, no business.

Another issue is, why should a market actually be vibrant? The companies that have brought the most value to minority shareholders are often the most boring companies.

"SPACs are a well established instrument designed to help entrepreneurial, skilled management teams to start new businesses and can represent high-return investment instruments for public investors at the earliest stage of value creation."

Well established, in which country exactly? I have read mostly negative stories about SPACs so far in a global context.

"High-return" often is accompanied by "high-risk", should people who invest in counters listed on Bursa invest in high-risk companies? The current batch of listed companies which IPO-ed with a business is already risky enough, I think.

"Clearly, the SPAC model can and does work."

I would first like to read some thorough research on that before I would agree with that statement.

"Imagine being offered the opportunity to buy into Facebook when Mark Zuckerberg was still in his Harvard dormitory (or Bill Gates or Steve Jobs, for that matter)."

Wow, talking about making statements with 20/20 hindsight. Just pick some of the most successful companies ever and then assume the managers of SPACs can identify them correctly in an early stage and act upon that with confidence by investing in them. Which SPAC actually did invest in these three companies? My guess is none. And what about the hundreds of failures for each success case, which is quite typical for these tech start-ups?

"SPACs may be assetless at the time of listing, but they do have a business plan that is as detailed and robust as that of any IPO."

It seems that Gan and I have a rather different opinion about what a business plan is. For me it describes past, present and future (including forecasts etc.). Regarding past and present, one sentence will do for SPACs since there is nothing except for a few people in a management team. Regarding the future, at the moment of an IPO the assets that the SPAC is going to acquire are unknown, therefore there is no possibility to give any forecast whatsoever.

"It stated that the average return of SPACs that completed a business combination between September 2003 and March 2006 was nearly 40%."

The period over which the profit is reported (only 2.5 years) is much too short to make any reliable assumption whatsoever. Also, readers should note that 2003 until 2006 was during the "happy go lucky" Greenspan/Bernanke time. I would like to see the returns from March 2006 until September 2008, the hart of the global financial crisis. I am sure that numbers will be very different, and will start with a minus sign. We need to see at least ten (preferably twenty) years for measuring returns, with at least one recession included.

The whole article "Special Purpose Acquisition Companies: SPAC and SPAN, or Blank Check Redux?" can be found here. The article is based on US companies in their environment, which is quite different from the Malaysian situation.

How SPACs in Malaysia will perform in the long term (in real operational earnings or in profitable asset disposals), I guess we have to wait and see. For the time being, I remain (very) sceptical.