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What the SPAC frenzy tells us about the market and ourselves

Yahoo Finance’s Julie Hyman, Brian Sozzi, Myles Udland, and Andy Serwer discuss the SPAC frenzy amid COVID-19.

Video Transcript

MYLES UDLAND: You've heard us say the word here quite often. I think some people may forget what it means. SPAC is the word on the tip of everyone's tongue these days. And in his newsletter over the weekend, Yahoo Finance Editor-in-Chief Andy Serwer took a look at this SPAC frenzy, Andy, and asked what it means about us. And I guess I would just start-- you know, I've thought a lot about SPACs, written a lot about SPACs, and just based on your work, where do you feel like we are at in the cycle of this mania, and how is it different, I guess, than anything else you've seen in your career?

ANDY SERWER: Yeah, we're definitely in the frenzy part of the cycle. And you know, as I was hitting deadline on Friday, Myles, I was just getting the latest numbers. So 20 SPACs filed S-1s on Friday alone. I mean, that is just a crazy amount.

And already, we're seeing numbers that are exceeding the number of SPACs, exceeding all of the SPACs that were done in 2020. So we had about 248 SPACs last year. We're on track now for 275. And so the number of these things is going crazy.

And of course, you're seeing all these boldface names getting into the action, both on the sort of Hollywood celebrity side and the business leader mobile side. So you know, a lot of people are jumping into these things. And I have to say-- and I know you know this-- they're not so straightforward. They're actually kind of complicated vehicles. And so for ordinary investors, you really need to watch your step here.

BRIAN SOZZI: Andy, you know who perhaps got all this kicked off? Dave Cote. You've known him for a while. You talked to him for this story. Former Honeywell CEO.

ANDY SERWER: Yeah. It's interesting what happened there, Brian. You know, he stepped down as CEO of Honeywell after a very successful run there in 2017, and he told me he was taking some time to figure out what to do. And a friend suggested, do a SPAC. And so he told me that he was really looking into it, trying to figure out what to do. And everyone told him, don't do it, because SPACs, you know, historically have not had the best reputation.

Ultimately, he decided to do it at the same time Goldman Sachs was looking to do one. So he teamed up with Goldman. And you know, Dave understands operating industrial companies, or companies in that sort of sector of the economy.

And they actually picked up this company called Vertiv from Platinum Equity, which is owned by the guy who owns the Detroit Pistons basketball team. And they've had a pretty successful run there. The SPACs generally trade at $10 before they buy anything. And the stock went from $10 then down to $5 in March of 202020, and now it's up in the low $20s.

So that's a pretty good example right there. And he told me that after he and Goldman did this deal, they were flooded with calls to do more and to actually ask him about how to do these things. But that was at the beginning of 2020, end of 2019. And since then, we've just seen this explosion.

JULIE HYMAN: You know, we've talked a lot on the show about how this feels not great. This explosion is back. And you talked to a lot of people who said, essentially, the same thing. But it's one stat that you put in your column that really stood out to me. According to Renaissance Capital, the average return on SPACs' common stock going back to, what, 2015 has been a loss of 1.4%. For IPOs, that's been a gain of 49%.

So these things have underperformed. That's not to say that they will. But it's interesting how much they've underperformed.

ANDY SERWER: Yeah. And you know, Julie, you're so right, because it's important to sort of compare them against IPOs, because essentially, a SPAC is a shorthand way of doing an IPO. And one of the reasons they became so popular-- Dave Cote aside-- in 2020 is because doing an IPO last year was very difficult, because you couldn't do a roadshow. And then also, because of the election, there was so much uncertainty in the market. And when you do a SPAC, go public through a SPAC, basically, a shell company is buying an operating company, and you can just, poof, go right into the public markets that way.

You can also do forward-looking projections, which is something you can't do in an IPO. You have to be very careful about that, which begs the question, where's the SEC in all this? That's a whole other story.

But the point is that because a lot of companies were sort of super aggressive about doing it this way, and so much money was flooding into this space, there are definitely some companies here that have not been such great performers. And I think also, you see all sorts of mispricing going on here, which speaks to the number you were talking about-- this pretty dramatic underperformance versus IPOs.

MYLES UDLAND: And yet my favorite frame is someone said, you know, all the EV SPACs are trading like they're going to be the winner of a winner-take-all market. And I think that is certainly kind of the challenge there. Andy, I know you thought a lot about it for this story, and I kind of see it myself, and I think this way. Do you feel left out that you're not part of a SPAC sponsorship team? Sometimes I feel like I'm the mark here. How hard could it be to jump onto one of these?

ANDY SERWER: Well, you know, Myles, with someone like yourself, as I said, these celebrities, high-profile people, it's all about the deal flow. So I'm sure if someone brings you in, you know, they'd be using the Myles Udland network to get a lot of other high net worth individuals into the mix. So I'm shocked that you haven't gotten tapped yet.

MYLES UDLAND: I agree. I think there is an opportunity for a digital media-type SPAC. I think we would be great consultants. So anyone out there who is-- and the other thing, too. A lot of people jumping on these SPACs-- it's kind of their side gig. So I don't see any issue here between us continuing to grind out Yahoo Finance and jumping on a SPAC.

We'll see how that works going forward. All right. Yahoo Finance Editor-in-Chief Andy Serwer. Andy, great story this weekend. Thanks for joining.

ANDY SERWER: Thank you.