Editor’s note: Today we shed some light on the current state of the SPAC market. Adapted from a Stansberry Risk Value special report, this article was recently shared in the Summary of Stansberry and has been edited for our audience. In it, our colleague Bryan Beach explains how the market ended up with a bunch of SPACs left for dead…and a surprising opportunity.
Henry Villard – a former Bavarian aristocrat, family outcast and American titan of 19th century industry – had a pesky thorn in his side…
A competitor threatened to overthrow the railroad and steamship monopoly he had established in the Pacific Northwest.
And so, in a move that would never fly in our regulated modern age, Villard began a clever plot to secretly take over its only regional competitor… the North Pacific.
Villard began buying shares of Northern Pacific on the sly. But even with his great wealth, he could not accumulate enough to take over the business. He needed to raise more money.
Villard knew that if he revealed his intentions, Northern Pacific’s stock would skyrocket and he would not be able to secure a majority stake. So he designed an entirely new financial structure – one that would change the trajectory of public stocks for the next 200 years…
Villard called this new structure the “blind pool”. He sent a newsletter, or “circular”, to friends… asking them to give him money for a secret business. Indeed, these investors would buy a share of Villard’s reputation.
His memoirs describe what happened next…
The effect of the circular was astonishing. The sheer novelty and mystery of the proposal proved to be an irresistible attraction…a steady rush for the privilege of subscribing ensued, and within twenty-four hours of the publication of the circular more than double the amount offered was requested. .
The plan worked perfectly. Villard obtained his controlling interest and found himself with a virtual monopoly on transportation in the Pacific Northwest.
More than the man or the company, it is the blind pool that has become the most important part of this old story. As the Los Angeles Times Put the…
Someone on Wall Street should erect a statue to Henry Villard.
Villard found that if you don’t tell investors how you’re going to spend their money, they become more impatient, not less.
This blind pool concept has evolved into what is known as a “blank check business”. Today, we call it a Special Purpose Acquisition Company (“SPAC”).
You probably recognize the term. It has become arguably the sexiest financial buzzword of 2020. That year alone, nearly 250 SPACs were raised over $83 billion of investors who paid with no idea what they were buying.
The momentum of SPACs continued in 2021, with more than 600 SPACs raising approximately $163 billion. But the shine eventually faded…
If you Google the word “SPAC” now, you’ll find pages of articles with buzzwords like “bubble” or “greed” or “excess.” In February 2022, things only got worse for SPACs. War broke out in Europe and investors fled uncertain markets. Since February 2021, the Bloomberg SPAC index has fallen an incredible 80%.
And just yesterday, news broke that investment bank Goldman Sachs was pulling out of most of the SPACs it had made public. With that, the SPAC boom lost even more fuel.
It sounds bad. And it’s proof that, 140 years after Villard’s blind pool, a full-blown SPAC bubble inflated – then burst – in just over 18 months.
But investors can make a fortune sifting through the remnants left over from bursting bubbles. If you have a contrarian trend, the next few quarters could be a watershed moment.
A private company can become public in several ways…
The most common way is through an initial public offering (“IPO”). Before even beginning the IPO process, a company must invest considerable cash to strengthen its financial, regulatory and legal departments and spend a year or two cleaning up its past financial statements.
With its back-office ducks in a row, the company must find an investment bank to help connect it to potential investors. Next comes a rigorous “road show,” in which management pitches its story to potential IPO investors in hopes of finding enough interest to sell shares to the public.
SPACs are an alternative way to go public. With a SPAC, a “sponsor” – a modern-day Villard – raises a lot of money to buy out a running business. However, unlike Villard, SPAC sponsors often don’t have a specific goal in mind when fundraising.
While raising the funds, the sponsors go to the trouble of setting up a publicly traded front company. They jump through all the regulatory hoops, create all the legal entities, do their own IPO, and put the money in the shell company’s bank accounts. When the dust settles, the shell has a stock symbol and can be traded on any normal brokerage account.
With logistics out of the way, the sponsors set out to find a private company to merge with. Once sponsors have identified a target, negotiated a purchase price, and finalized the merger, they can deposit that operating business into the publicly traded shell.
For their hard work, the sponsors retain 20% of the newly merged company. If they don’t find a target within two years, the money goes back to the investors.
It is important to understand these dynamics. If the sponsors can find a target and achieve a merger, they get 20% of a mining company. If they can’t, all their efforts to build a public shell and raise funds are wasted.
From a private company perspective, the IPO process through a SPAC merger is faster and cheaper than the traditional IPO process. Much of the challenging sledding has already been handled.
So, in a perfect world, a SPAC transaction is a win-win situation for both the sponsors and the acquired business.
I’ve covered SPACs since launching my Stansberry Risk Value newsletter in 2017. But it was only recently that, despite a relatively long history, they were all the rage, bloated, and then burst.
The SPAC boom was dumb. But I believe the SPAC sell-off we’re seeing right now is also an overreaction. Tomorrow, I’ll explain why so many SPACs are failing – and what that means for your money.
Editor’s note: Now that this corner of the market has had its heyday – and it’s collapsed – Bryan sees the opportunity of a lifetime. He focused on a specific, rare type of SPAC that was unfairly punished… And he says that when those few SPAC “diamonds” recover, investors could see up to 1000% gains in as little time. only two years. He shares the details in a brand new interview… Watch it right here.
Many people are pulling out of stocks right now as uncertainty grips the market. And with everything going on in the world today, there’s no telling when the volatility will end. But history shows that better returns may be yet to come… Read more here: Stocks Become A Violator’s Dream.
“Investors have a tremendous opportunity,” writes Enrique Abeyta. After nearly two years of rising stocks, people have turned their backs on this type of investing. But if we sift through the rubble, we could make big profits… Read the full story here: How to buy your stake in private companies like the Wall Street elite.
INFLATION CAN’T KEEP THIS SNACK KING DOWN
Today’s business has the wherewithal to stay afloat in today’s volatile market…
With inflation set to last through 2023, investors are looking for companies with “pricing power”… If most companies raised their prices to keep up with inflation, their customers would just walk away. But companies with pricing power — and brands consumers love — can raise prices without reduce the demand for their products…
Kellogg (K) is a $25 billion breakfast and snack giant. Its brands include Froot Loops cereal and Nutri-Grain breakfast bars… as well as Pringles crisps, Cheez-It puffs and Eggo waffles. Over the past few months, Kellogg has raised prices to stave off inflation, but that hasn’t stopped consumers from filling their pantry with Kellogg products… In the past quarter, organic sales (excluding acquisitions and spinoffs ) reached $3.7 billion. That’s up 4.2% year-over-year.
As you can see, despite the difficulties in the broader market, K shares have risen more than 10% over the past year and recently hit a new multi-year high. And as long as people stick with their favorite Kellogg brands, this company’s pricing power will keep it strong…