During the pandemic meme stock bubble, SPACs, or special purpose acquisition companies, emerged as an attractive way of taking a company public.
In simple terms, a SPAC is a shell company that raises money from investors and then lists on an exchange. The people that set up the SPAC then acquire another business and, via a reverse merger, that business then ends up as a publicly-traded company.
There are some other reasons that may explain why SPACs were appealing to both companies and the people setting them up.
Companies being taken public via a SPAC do not have to go through the regulatory loopholes or roadshows that typically accompany an initial public offering. It also means you don’t have to issue new equity, so shareholders can use a SPAC to cash out of a business, rather than having a ‘normal’ IPO and being subject to a lengthy lock-in period.
On the other side of the transaction, anyone that set up a SPAC and managed to complete a deal was typically rewarded handsomely for doing so. Their investors could also ‘game’ the SPAC system to make some easy money.
This could be done by taking advantage of a couple of SPAC peculiarities. One of these is that initial investors in a SPAC typically buy units that are comprised of both a share and a warrant. Another is that investors are able to redeem their shares in the SPAC once a deal is announced, even if they vote for it to go ahead.
What this means is that SPAC investors can…
Buy units in the SPAC and get shares + warrants
Vote to approve a deal and then redeem all their shares (ie. get all their initial investment back)
Keep the warrants and either (1) sell them to someone else or (2) exercise them and get shares in the listed company, either to sell or hold on to
Some hedge funds made a lot of money just doing this during the SPAC boom over the past few years.
Anyway, the reason I bring all of this up is because it seems likely that Saxo Bank is going to take the SPAC route to the market by merging with an Amsterdam-listed SPAC called Disruptive Capital Acquisition Company (DCAC). The man behind DCAC is famous private equity investor Edi Truell.
There are some interesting things about the deal. One is that Saxo wasn’t the company DCAC wanted to invest in. DCAC went public in October last year and, less than two months later, bid for a subsidiary of UK asset management group River & Mercantile. They ultimately lost out on that bid to Schroders, another UK asset management group.
Another feature of SPACs, not mentioned above, is that the people managing them typically have a set amount of time to complete a takeover, otherwise they’ll have to return funds to shareholders. In DCAC’s case, they had 15 months from October of last year to complete a deal, with the (expensive) option of two three-month extensions.
So what probably happened is that DCAC raised a load of money with the intention of buying the R&M business. This then failed but the DCAC managers still wanted to make money by completing a takeover. The time limit to do this was 15 months, starting from October 11th last year. They looked at a load of businesses and found Saxo, then saw they only had a few months left and thought, ‘yup, that will do, let’s take them public.’
One question here is whether the DCAC managers found Saxo or Saxo found them. Or in other words, were some Saxo shareholders looking to cash out or did DCAC approach them and try to convince them to go public.
As noted, a SPAC transaction does not normally involve issuing new equity – existing investors cash out by selling their shares.
That is what will happen if the Saxo-DCAC deal goes through. I assumed it would be Kim ‘Saxo, Saxo Man’ Fournais that sold his shares and went off to lie on a beach somewhere, like at the end of Trading Places.
But according to the press release accompanying the announcement of the merger, it’s actually Geely and Sampo who will be selling. Some readers may recall that Geely, a Chinese car manufacturer, became the majority shareholder in Saxo four years ago, with a 50.89% stake in the firm. Sampo, a Finnish insurance company, acquired a nearly 20% stake at around the same time.
We’ll have to wait and see how much of their respective holdings these two companies choose to sell. The press release also said that Fournais will be acquiring more shares. Again, it will be interesting to see if this happens and what stake he is left with.
As to why Geely and Sampo chose to sell, it’s impossible to say but we can speculate with the following options…
They want to derisk / take profit from their investment – seems possible given that they don’t appear to be selling everything, although it may also be possible that they can’t sell everything.
They weren’t happy with their investments and had the opportunity to sell.
The final point will be what happens with regard to redemptions. If lots of DCAC shareholders choose to redeem their shares that leads to a shortfall of cash. Were that to happen, DCAC’s managers will have to go and look for more investment. I doubt this will be a problem but it will still be interesting to see what happens.
Future predictions
The whole MetaQuotes – app store saga has been made into something of a ‘historic’ moment in the CFD world.
With that in mind, I’ve been thinking about a couple of other trends that I think are likely to develop over the next 12 – 18 months. Feel free to send hate mail or politely disagree as I accept I could be totally wrong.
One thing is that crypto may end up dying or, at best, seeing even more downward pressure on prices. Beyond the fact that crypto has failed to meet any of its use cases, there are three main reasons I think this will happen.
- With rates rising, you may actually be able to generate a decent yield from low risk fixed income or cash holdings. Beyond the fanatics, it is hard to see why you would hold crypto in place of this.
- The global economy is probably going to get worse, with tough times ahead for people (eg. just look at the impact of rate rises on people refixing their mortgages). In such a scenario it is hard not to think that some crypto people are going to become forced sellers, which means more downward price pressure.
- Dollar pegs will probably break at some point. Tether’s reserves, for example, do not instil the reader with massive confidence. Any breaks on dollar pegs are going to massively destroy confidence in the market + bits of infrastructure.
The next trend that I think might be interesting is more M&A. Assuming the era of cheap money is over, there are going to be lots of unprofitable fintechs struggling to raise cash.
One example of this could be Plum, a UK / Cypriot company that started as a savings app but which has since branched out into crypto and stocks. It’s plausible they’ll start to make more money as rates rise but it’s also possible they’re going to just burn through the cash they’ve got and then struggle to raise money.
Were that to happen then they could look appealing to a CFD provider. They claim to have 1.3m users (the actual figure is probably much lower) and offer a set of products (crypto + stocks) that many brokers are looking to expand into. Assuming you could get a good deal, why not?