The Ultimate Guide to SPAC Warrants in 2020

The SPAC, or special purpose acquisition company, has taken Wall Street by storm. If there was any question about the legitimacy of SPACs, that was laid to rest when the head of the New York Stock Exchange left his post, not to take a high paying job at a lobbying firm, but to run a SPAC.

What is a SPAC?

A SPAC, or Special Purpose Acquisition Company, is formed to acquire another business. Sometimes called “Blank Check Companies”, a SPAC becomes a publicly traded company through an IPO. When the SPAC finds a business to buy, the owners of the SPAC common stock vote on whether or not the acquisition can move forward.

The concept of the SPAC is pretty simple. But how do SPACs work exactly?

We all know someone who’s good with money. They always pick the right stock (or at least don’t tell you when they lose money in a stock), and they started their own company at age 15 and are now retiring at age 25.

What if you could give money to that person, let’s say it’s Uncle Bob, and say, “Uncle Bob, just do whatever you did the first time with your money and make me rich too.”

Uncle Bob replies he can’t start another company, only one great idea per lifetime, but maybe he can find a company that is already in business that looks pretty good and he’ll buy it with your money and run it for you.

If you understand that example then you understand what a SPAC is.

There are various flavors of SPAC. Most SPACs have a mandate to buy a business in a specific business area, for example, in Fintech. And some have a mandate, or at least a preference, to buy in a specific country or geographic region.

How are SPACs Structured?

The structure is the same for most SPACs; raise money, find a company to buy, ask the shareholders of the SPAC to agree to the purchase, and buy the company. Which, the shareholders of the SPAC will now own.

Since we’ll be talking about warrants associated with SPACs, there are only a few specific characteristics that are important to us.

First, SPACs generally have a warrant and a common stock. We talk about why warrants are issued here, but if there were ever an IPO that needed a little sweetener for investors it’s a SPAC.

Second, the SPAC must complete a purchase of a company in a specified time period, usually two years, or the warrants expire worthless and the remaining funds are distributed back to the shareholders.

And third, once the SPAC management (Uncle Bob) announces they are buying a company, the purchase must be approved by the stockholders of the SPAC. The closing of the acquisition is called the De-SPAC transaction.

Two Profitable Trading Patterns for SPAC Warrants

I’ve found you can make at least two profitable trades in a SPAC warrant with high degrees of success. The first trade is often the easier money, but a harder trade to get into due to the small time window.

It requires that you pay careful attention to a list of SPACs and that you get an email alert when a SPAC announces it’s plan to purchase a business. The hard part of the trade is that it can be very time sensitive and occurs only episodically.

SPAC warrants are included in my weekly list of Warrants to Watch

You can follow your SPAC list by putting the term “SPAC” into your Google alerts or, if you want to limit the number of alerts you get, you can put a little more time into your alert creation at the beginning. You can also create your own list of SPACs and place those names into your Google alerts.

Announcement of an Acquisition

The first trade with the SPAC warrant is when the acquisition is announced. If you have your list in hand, you should be able to get notification of an acquisition announcement the day of the announcement.

When alerted you have to be prepared to execute the trade quickly. I’ve found you have a good chance of making a nice return if you can buy the warrant on the first day of the announcement.

If you can’t buy on the first day, generally the SPAC warrant moves up for a few more days before gradually selling off prior to the actual approval of the takeover.

The actual shareholder vote for approval of the acquisition may take several months to happen. During this time the underlying company may have good, bad, or no news.

With no news the warrant tends to drift lower as investors and traders are no longer paying close attention to the deal. Good news may send the warrant higher, and bad news, which may adversely impact whether the deal is done at all, may send the warrant much lower.

Which brings us to the second trade.

Approval of the Acquisition

This trade is harder because it requires you to be vigilant with your list of SPACs.

The warrant generally tends to spike the day of the announcement, and for the next few days. It then drops again prior to the shareholder vote. If the vote goes through the warrant will usually spike again if a positive vote outcome is announced.

Your job is to determine whether or not the takeover / merger of the SPAC and it’s target company will be approved. I’ve found that in many cases it is relatively easy to predict the outcome by following what the SPAC management is doing prior to the vote.

One positive indicator you can look for is management buying out other shareholders in order to control the vote. If you believe the acquisition will be approved you can get long the warrant just prior to the shareholder vote. My SPAC course, which is available with Warrant Secrets, goes into detail on this and several other factors to consider.

Bonus: Hedge Fund Impact on SPAC Acquisitions

When determining whether or not the SPAC acquisition will be completed pay careful attention to hedge funds invested in the SPAC. A SPAC can be a great place to park capital and take a relatively risk free shot at buying a good / undervalued / distressed company on the cheap.

The current low interest rate environment adds even more appeal to this option. As a result, you’ll find that hedge funds are often holders of fairly large percentages of SPAC shares.

Once the proposed deal is announced the invested hedge funds (as well as all the other shareholders) will conduct their due diligence and decide whether or not they want to be a shareholder in the new company.

If it looks like a good deal they can simply vote their shares for the acquisition and remain shareholders. But if they don’t like the deal they can sell their shares, generally at very close to the price they paid for them originally.

But, a large shareholder in a SPAC also has a third option. If management truly wants to get the deal done (and they may for various reasons) a large shareholder can offer to sell their shares to management, so that management can vote the shares in favor of the acquisition.

If management does not want to buy the shares the fund can vote those shares against the acquisition, and simply have it’s original capital returned when the SPAC is dissolved.

If you find management buying out other shareholders as the voting date for approval of the acquisition approaches, there is a very high likelihood the deal will close.

Generally, when it is announced the acquisition has been approved, the warrants rise again. If the warrant has risen in anticipation of the vote, it likely won’t rise as much after the vote.

But, if there is warrant has not risen prior to a positive vote for the acquisition, there will likely be an increase in the warrant price immediately after the vote. You’ll want to be long ahead of the closing and sell into the pop after the approval.

SPAC Trading After Acquisition

After a SPAC has completed an acquisition the SPAC then trades as any other company listed on an exchange. If you came across a SPAC stock several years after the acquisition, you would likely have no idea it ever started as a SPAC unless you did some research into the company’s history.

Most SPAC warrants have a 5 year term, and trade like any other warrant after the SPAC acquisition. Most SPACs warrants are callable if the underlying common meets certain requirements.

An example would be,

If the common stock trades above $20 for a period of 20 days in any 30 day time frame the company may call the warrants for exercise.

Finally, the SPAC symbol and name will change to reflect the company that has been purchased. Often the SPAC takes on the name of the new company, but that is not always the case. If you own either common shares or warrants in your brokerage account, those shares will automatically be converted to the new name/symbol.

The terms of the warrant will remain the same as they were under the SPAC. But, obviously they will be convertible into shares of common in the new company.

On some occasions, as with Waitr (WTRH, WTRHW), new and more favorable terms for the warrant holder may be put forth by the company. This might occur if management wants to raise additional capital shortly after the acquisition.