The Hot IPO Trend of 2020: Pay Up Now, Acquire Something Later
The companies raising the most money in the IPO market right now have no revenue, aren’t profitable and lack long-term business plans.
That is by design: They are blank-check companies, whose purpose is to raise money for acquisitions.
So far this year, these special-purpose acquisition companies, or SPACs, have raised $6.5 billion, on pace for their biggest year ever, according to Dealogic. In April, 80% of all money raised for U.S. initial public offerings went to blank-check firms, compared with an average of 9% over the past decade.
The jump shows investors are betting there will be good deals to scoop up when the coronavirus subsides, but remain hesitant to put cash into companies going public soon.
“The IPO asset class in general is the last to recover in volatile periods,” said Shiv Vasisht, co-head of Global Strategic Equity Solutions at Bank of America Corp.
IPOs in the U.S. raised about $2.6 billion in April, according to Dealogic. Of that, $2.2 billion went toward blank-check companies. This month through Tuesday, SPACs had raised $575 million, Dealogic data show.
Blank-check companies raise money by going public and then hunt for a company in which to invest the funds they raised. They typically have two years to identify a target, and the investment is subject to shareholder approval.
Among the blank-check companies to go public in the past two months were a pair from Social Capital Hedosophia Holdings. SPCE 0.22% Combined, they raised more than $1 billion with the intention of acquiring technology companies.
Social Capital Hedosophia last year made a splash when its first blank-check company invested in Virgin Galactic, Richard Branson’s space-tourism venture. Virgin Galactic’s stock soared after it went public by way of the Social Capital Hedosophia firm, and recently traded roughly 60% above its official October listing.
Still, blank-check companies’ stock performance has lagged in recent years. From 2010 to 2017, the companies underperformed the broader market by about 3% annually for the first three years after their IPO, according to an analysis of 92 blank-check listings in that period by University of Florida finance professor Jay Ritter, who studies IPOs. Meanwhile, traditional IPOs typically outperform the broader market.
Since the start of March, roughly a dozen blank-check firms have tapped the U.S. public market.
Live Oak Acquisition Corp. is one of them. Its executives met with about 30 potential investors in late February to test the waters, according to Chief Financial Officer and director Andrea Tarbox. Then coronavirus rattled the U.S., shutting down corporate offices and even the New York Stock Exchange trading floor. The day of the company’s call to plan a virtual roadshow in March, the Dow Jones Industrial Average tumbled nearly 3,000 points.
Live Oak waited out the turbulence. Last week the company listed its shares following a two-day virtual roadshow. Instead of ringing the NYSE bell, Ms. Tarbox rang a bell at her beach house in South Carolina to celebrate.
The firm is eager to start evaluating targets, which will include companies in financial services, industrials, business services and real estate. Ms. Tarbox said she hopes that by the time the company’s initial work is done plane travel will be less forbidding so Live Oak can better vet potential acquisitions.
In the case of Social Capital Hedosophia, at least one of its vehicles is likely to find a deal sooner rather than later, a person familiar with the matter said, given the state of the IPO market and the cash needs of startups.
At the same time, the IPO market may be showing signs of thawing. As the U.S. stock market has steadied—in past week the tech-heavy Nasdaq Composite briefly turned positive on the year—so has the appetite for some new listings. Bankers say bigger IPOs, such as for Albertsons Cos., could take shape as early as this month.