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SPACs may spur $300B in M&A activity over the next 2 years: Goldman Sachs

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Blank-check companies looking for deals could lead to $300 billion in mergers and acquisitions over the next two years, according to Goldman Sachs analysts led by David Kostin. The firm found that special-purpose acquisition companies, or SPACs, have raised $70 billion in 2020 — a fivefold increase from 2019, and expects a high level of SPAC activity will continue into 2021.

Video Transcript

MYLES UDLAND: As the year wraps up and we continue to get retrospectives from various Wall Street banks, David Kostin and the team over at Goldman Sachs getting attention this morning in declaring, Julie Hyman, that 2020 is the year of the SPAC. And Goldman going through all the different stocks that have come to market. I thought it was quite helpful. They had a graphic in there-- all 36 of them. Nikola, of course, is the 34th best performing out of all 36-- worth noting there.

They kind of kicked the whole thing off. But I think also, thinking about why SPACs happened at all-- And as we see here in the lower third, Goldman's view is this isn't going anywhere. I mean, this is really the future of M&A and private capital deployment, at least as far as Goldman Sachs can tell.

JULIE HYMAN: They're sort of extrapolating, right, that things will continue at the current pace. So they are looking at a ratio they say of five times SPAC equity capital this year to target M&A enterprise value. So that's what these companies are looking at and that's what they're paying here. So that's where they get their $300 billion number.

And it really seems as though there are a couple of reasons why, if you're a private company, a SPAC might be attractive to you. First of all, there's that guarantee payout, right? You know what you're going to get up front. There's no sort of guesswork about negotiating the pricing of the IPO, not knowing where it's going to trade on that first day, but also not knowing where it's going to price necessarily.

And there's also, as we know, not as much regulatory transparency that is required. Now, in the case of something like Nikola, didn't turn out so well in the end, because eventually, things did come out that investors were not too happy about. But those seem to me to be the two kind of driving factors behind some of these facts.

BRIAN SOZZI: With all due respect to Goldman Sachs, guys, it's also the year of the McRib. But I also want all to note this, too. 53% of SPAC capital has come since Labor Day, according to Goldman Sachs. And you know what happens with that? Potentially more eyeballs. We've seen a lot of eyeball, a lot of coverage on SPACs.

We've brought a lot of these guests on to talk about the future of their companies. But more regulation. At what point does the SEC come out next year and start cracking down on these companies, because it is too easy to go public via a SPAC deal? You just don't get that type of scrutiny as you do the traditional IPO process. So I wouldn't be surprised the SEC comes out here and drops the hammer.

MYLES UDLAND: You know, and I think another interesting aspect here-- and Byrne Hobart, who used to be an equity analyst, he now writes a newsletter-- it's called "The Diff." It's on Substack, like everybody else is. He had a great note on SPACs last week, I think it was.

And he made the point, which Goldman gets at here, which is that SPACs are this perfect example of how investors think today. Byrne's point was that the average good SPAC is better than average, and a bad SPAC is worse than average. And so really, it sort of just stills down to.

And look, Goldman is building their work, like all shops do, off what their clients tell them. And basically, clients are saying, Sozz, we're willing to deal with new disclosures. But if this thing hits, it's going to hit better than a regular index one, right?

And if it plays out, whatever. Fine. Onto the next one. There's more SPACs where that came from. And I think that really kind of says it all about the market today.

And we talked all show about the inability to get returns. Well, you got to swing for the fences. You got to bring that slugging percentage up. And I think that's an enduring theme from the last decade that I expect will continue as we get into the next. All right, that's going to do it--