The management team in a SPAC can have a huge impact on SPAC warrant traders.
I’ve had the opportunity to consult a lot of different managers and management teams.
Some were good. Some were bad. Some were competent. Some were not.
Some were experienced in their particular industry to the exclusion of all others. Some were generalists that could work across silos. Though that is increasingly rare.
Some could see the big picture of the entire enterprise. Some were heads down in their business unit, and couldn’t fathom the importance of their business interacting with the enterprise as a whole.
Some could do acquisitions well. Others not so much.
An Unfortunate Acquisition Attempt
For example, one particular management team I was consulting brought an acquisition to the company board which fell completely flat. (And yes, I and my consulting colleagues had told them it was a bad idea.)
Wall Street analysts would have laughed the company off the stock exchange if they had announced the acquisition.
Let’s say the company produced fighter aircraft (it didn’t). The business unit I was working with was a special innovation group. In their defense, they were supposed to find new and innovative businesses for the company to acquire.
But, even in innovative business units in public companies, there is an unwritten understanding that the innovation should be in some adjacent business. Or at least one that you can argue is adjacent.
Be innovative, shout out to Clayton Christensen…just not too innovative.
There needs to be a connection, via technology, business model, culture, etc. Preferably there is a connection to the new business on many of these criteria.
This innovation unit in the fighter aircraft company could have looked at a commercial aircraft maker, a rotary wing manufacturer, an aerofoil business, a space company even…you get the idea.
But somehow, they made a connection via their technology and culture, which was “it has to be done right and safety is an overriding factor”, to…wait for it…a roller coaster manufacturer.
Now, these were bright guys. Many of them former military leaders and the others astute businessmen in their respective industry.
But, they didn’t grasp the fact that an acquisition of a completely unrelated business wouldn’t fly (pun intended) on so many levels it was almost laughable.
And, as the innovation unit of the company, this was a very large part of their jobs. They did acquisitions on a fairly regular basis.
So, why are we talking about fighter aircraft makers and roller coaster companies and befuddled management? I thought we were here to delve into SPAC investing.
A Special Purpose Acquisition Company (SPAC) is a company with one singular purpose, to do an acquisition. Acquisitions aren’t easy. Even for management teams that do them on a regular basis.
There are three phases in the life of the SPAC we are interested in as SPAC warrant traders:
- Pre-acquisition to acquisition announcement
- Post acquisition announcement to shareholder vote
- Post shareholder vote
In each of these we have us, warrant traders/investors, and management.
1. SPAC Pre-acquisition to Acquisition Announcement
As our friend Kenny Loggins would say, this is the “danger zone”.
This is the area the SPACfolio, our members only portfolio of SPAC warrants, focuses on.
SPAC Warrant Investors
Buying warrants in this phase is a very tricky business. If the company announces an acquisition, it’s off to the races.
The recent announcement by Thunder Bridge Acquisition (TBRG, TBRGW) sent this SPACfolio holding up 157%, to our target price of $.90. Not a bad return for a three month old position.
But, on the other hand, if a SPAC fails to identify an acquisition target and folds, the warrants can go to $0.
The goal of the SPACfolio for a SPAC warrant trader is a “good” return, with some holdings being home runs, and some holdings being strikeouts.
The portfolio manager can add value here in the form of research and a scoring of SPACs that are more or less likely to “announce” acquisitions.
Remember, at this point all we need is the announcement for a big gain. Shareholder approval of the acquisition is (mostly) irrelevant. And, completely irrelevant is whether management will be competent to run the company going forward.
SPAC Management
In this phase management is focused on identifying a target for acquisition.
What are some of the questions we could ask that might impact this search?
- Does the industry identified for acquisition have a sufficient number and appropriately sized targets
- Is management experienced in doing acquisitions
- Is management experienced doing SPAC acquisitions
- What is management’s incentive to find a target
- Is this a career SPAC team that will do another SPAC after this one
- Is this a one time former CEO (or other type of manager) that is looking to do a one and done
- What are the prospects of the target industry or country/region
- Is the target in a country/region that is currently experiencing trade or other issues with the U.S.
These are some of the criteria we could use to score the SPAC on whether or not it will likely announce an acquisition, enhancing our returns as SPAC warrant traders.
Meanwhile, in this phase, the market is doing its own scoring. We can easily see this in the price of the SPAC warrant.
A lower priced warrant means the market has determined there is less likelihood of an acquisition. A higher priced warrant tells us the market is fully expecting an acquisition to occur.
By identifying a mix of low and high probability acquisitions we can manage the risk/return profile of a SPACfolio.
We can also add value by identifying SPAC warrants the market has mispriced. If, using the criteria above, we can spot SPACs that are likely to do an acquisition that the market has priced as not likely to do an acquisition, we can capture this inefficiency.
2. SPAC Post Acquisition Announcement, to Shareholder Vote
In this phase management turns to a marketing role while investors read the tea leaves on whether the acquisition will be approved.
SPAC Warrant Investors
The typical pattern for warrants in this timeframe is to drift lower and then resume an uptrend as the vote draws near.
Warrant holders need to determine whether the acquisition will be approved in this phase. If the acquisition is voted down the warrant can still go to $0.
Some of the criteria to determine the success chances of a vote before it takes place are:
- Is management buying up common shares
- Is management buying warrants
- Does the target company match the original prospectus, e.g., correct industry, country/region, business model
- Does management have previous SPAC experience
- Has a large holder of common shares indicated they will vote for the acquisition
- Has a large holder of common shares sold their holding
A successful vote will most likely mean a rise, at least near term, in the warrants.
But, this is dependent on how much premium the warrant already contains, and where the common trades immediately after the shareholder vote.
SPAC Management
Management in this phase turns from target acquisition to selling the acquisition to shareholders. Time for the roadshow.
This is a different skill than target acquisition. Some management teams are proficient at marketing their target, while others lose control of the process at this point.
A fighter aircraft SPAC that identifies a roller coaster company as its target usually goes off the rails at this point.
Maybe the management team has succumbed to shiny object syndrome and lost the trust of investors.
Previous SPAC experience is definitely a plus for management during this phase, and should be weighted more heavily by investors.
3. SPAC Post Shareholder Vote
Assuming the vote to approve the acquisition is successful, this is the point at which good old stock picking kicks in.
SPAC Warrant Investors
At this point warrant traders who have been in the warrant in phase one, two, or both, can make a decision on whether to hold the warrant and become investors.
It could also mark a point when you can begin arbing the warrant against the common with a percentage hedge. This is almost certainly the first time the common will be shortable to allow this type of trade.
The historical performance of SPACs post merger has been somewhat checkered. But, the growth and maturation of the industry is leading to better and more investable opportunities in the SPAC space.
Investors will want to pay particular attention to management changes at this juncture. Is management of the target company staying on, or are they cashing out and moving on? What is the actual management experience of the SPAC team in the target company’s business?
SPAC Management
While management in stages one and two is not a primary focus, it now becomes the whole enchilada.
Some management teams are serial SPAC founders, and will leave the prior management team of the target in place to continue running the company. Think Warrant Buffet acquisition model.
Other SPAC management teams may be industry experts themselves and are ready to add value to an underperforming target.
As an investor you’ll need to determine what management flavor pertains to your SPAC and weigh that in your SPAC warrant investment decision if you decide to hold on post acquisition.
Conclusion
The three phases of a SPAC’s life offer warrant traders and investors a number of opportunities to profit. It is imperative to know which phase you are in and what the important criteria are, for both management and investors, in each.
SPACs are increasingly important to anyone wishing to enhance their portfolio returns. They are rapidly becoming more numerous but, at the same time, a the lack of interest/knowledge on how to trade their warrants offers those paying attention a chance to profit in an uncrowded trade.