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SPACs are just getting started
The “blank check” acquisition funds known as special purpose acquisition companies, or SPACs, have raised more than $30 billion so far this year, versus $13 billion in all of last year. Can they keep it up? DealBook spoke with some of the most plugged-in SPAC bankers and lawyers on Wall Street, and they cited three factors driving the boom:
1️⃣ Valuations are soaring for popular SPAC targets
“The pipeline is heavily weighted to technology and growth companies,” said Niron Stabinsky, who leads SPAC deals at Credit Suisse. He said that he speaks to big venture firms “weekly” about their portfolios. Many have taken notice of recent success stories, like Virgin Galactic’s merger with a SPAC led by the former Facebook executive Chamath Palihapitiya. SPAC offerings will be “incredibly active post Labor Day,” said Paul Tropp, the co-head of Ropes & Gray’s capital markets group. That’s part of a “significant uptick” in listings expected to hit the market before election-related uncertainty sets in: Yesterday, the tech firms Asana, JFrog, Snowflake and Unity all filed to go public.
2️⃣ SPACs aren’t just an alternative to traditional I.P.O.s
“SPACs have become a new way of doing an M.&A. deal,” said Jeff Mortara, the head of equity capital markets origination at UBS. A merger with a SPAC allows the target company’s investors to retain a stake while gaining liquidity, and deal negotiations can be done directly, secretly and quickly. SPACs typically have two years from their I.P.O. date to complete a merger.
3️⃣ The flood of money to SPACs means better terms for targets
“Everything is negotiable,” the venture capitalist Bill Gurley wrote in a detailed case for SPACs on his blog this weekend. As competition between SPACs intensifies, “sponsors are continuing to negotiate deals that look better for the companies they buy,” he said in the essay, which quickly became the talk of Wall Street and Silicon Valley.
Why? Some SPAC sponsors are open to a smaller “promote” — the stake the sponsor gets essentially free after a merger. (Traditionally, a sponsor takes 20 percent.) SPACs also award warrants to the vehicle’s investors, which give them the right to buy larger stakes in the merged company at a discount; these are becoming less dilutive as sponsors shift their terms to be more favorable to the target company. In the life-sciences industry, where SPACs have “nearly replaced late-stage financing and I.P.O.s,” warrants have come down to zero in some deals, said Christian Nagler, a partner in the capital markets practice at the law firm Kirkland & Ellis.
The standard-bearer of a new approach for SPACs is the $4 billion fund sponsored by Bill Ackman’s Pershing Square, the largest to date. The fund’s warrants are structured in a way that encourages investors to stay invested longer in the merged company, and Pershing will take its “promote” only if the company it buys meets certain performance goals. Sponsors without Mr. Ackman’s reputation may find those terms hard to imitate, but some are adopting similar elements all the same, experts say.
What’s next? Mr. Gurley predicted that SPAC fund-raising this year could be four times higher than the previous record, set in 2019, implying another $20 billion or so to come. The buoyant markets are attracting figures not known for deal making to the space, like the former Congressman Paul Ryan and the baseball executive Billy Beane, which sows doubts among some about the durability of the boom. Just SPAC mergers involving electric car companies and auto technology firms — “deals on wheels,” as one analyst put it to The Times’s Neal E. Boudette and Kate Kelly — are already worth more than $10 billion.
Today’s DealBook Briefing was written by Andrew Ross Sorkin in Connecticut, Lauren Hirsch in New York, and Michael J. de la Merced and Jason Karaian in London.
Here’s what’s happening
President Trump opened the Republican convention with a blizzard of attacks. On the first day of the event, Mr. Trump boasted about the strength of the economy, despite the coronavirus, and assailed Joe Biden. Tonight’s lineup features speeches by Melania Trump, Secretary of State Mike Pompeo, Tiffany Trump and Mr. Trump himself (again). The Times will have live coverage (and fact-checking) throughout the evening.
TikTok followed through on its lawsuit against the U.S. The Chinese-owned video app sued the Trump administration yesterday over a presidential executive order that would ban it in America. (Read our analysis of TikTok’s legal prospects here.) Of note: TikTok rebuffed the president’s demand for a fee to the Treasury Department from any buyout by an American company.
Researchers found the first documented case of coronavirus reinfection. A man in Hong Kong was infected by a different strain more than four months after his first bout with Covid-19, according to a forthcoming study. He was asymptomatic the second time, but the finding raises questions about how long immunity to the disease lasts.
Delta will furlough 2,000 pilots in October. The move will affect nearly 20 percent of its pilot force, and came despite 1,800 pilots agreeing to early retirement. The airline also reportedly plans to issue new debt backed by its frequent-flier program.
Black homeowners face discrimination during house appraisals. Valuations of Black-owned homes tend to come in far lower than those of white-owned houses, even in mixed-race and predominantly white neighborhoods, The Times reports. Relatedly, here’s an examination of how redlining has made majority Black neighborhoods far hotter, temperature-wise, than other areas.
End of an era
The Dow Jones industrial average is getting a makeover at the end of the month: Amgen, Honeywell and Salesforce will be added to the index, replacing Exxon, Pfizer and Raytheon.
Apple’s stock split is to blame. The 124-year-old stock index is price-weighted, a quirk that means the influence of its 30 components is based on their share prices, not their market values. Apple’s four-for-one stock split will reduce its weight in the Dow from about 12 percent to 3 percent, without any change in the tech giant’s $2 trillion market cap. So the index committee made changes to weights and membership to “better reflect the American economy,” it said.
Exxon was the Dow’s longest-serving member. It joined the index in 1928, as Standard Oil of New Jersey. Its replacement by Salesforce is an apt reflection of the times, with data in the cloud gaining prominence over oil in the ground. The Dow has recently lagged the S&P 500, which is weighted by market value, as the latter is more representative of today’s tech-dominated stock market. For all the attention that the Dow gets as a proxy for the broader market, assets tracking the index were worth about $31 billion at the end of last year, a small fraction of the $11 trillion tracking the S&P 500.
Take Note: Moving the goal posts
Michelle Leder is the founder of the S.E.C. filing site footnoted*. Here, she looks at how companies are making it easier to earn executive bonuses during the pandemic. You can follow her on Twitter at @footnoted.
Last summer, when companies started setting executive pay targets for 2020, it’s safe to say that nobody had Covid-19 on their minds. The economy had entered its longest expansion on record, and the idea that business would come to a screeching halt seemed unfathomable.
And early in the coronavirus outbreak, many companies either reduced or stopped paying salaries for top executives. But now, as the pandemic nears the six-month mark in the U.S., a number of companies are making changes to the way bonuses and other incentive pay is granted. This typically forms a larger share of executive compensation than base salary, and is awarded based on a complicated formula of pre-established goals.
Take Wynn Resorts International, the casino and hotel operator. By the time Las Vegas reopened in early June, visitor traffic was on its way to a 50 percent decline for the first half of the year. In turn, Wynn’s compensation committee “established significantly reduced target incentive levels of each named executive officer’s annual bonus target” for the second half of 2020, it said in an S.E.C. filing.
The industrial group HD Supply disclosed last Friday that it would base its annual incentive plan on profit performance for the last six months of fiscal 2020, which typically ends the first week of February, instead of the full year. That same day, the health care management company CorVel said that it would “adjust downward” the earnings per share target for executives to receive performance-based stock options.
At the end of July, the software company ServiceNow disclosed that it was lowering its annual targets for both cash bonuses and performance-based shares. Target Hospitality, which focuses on workplace housing, recently revealed that its C.E.O., Brad Archer, would receive a part of his pay that normally consists of restricted shares in cash instead.
And the publisher John Wiley & Sons, whose fiscal year ends on April 30, disclosed in its annual proxy that it would adjust its calendar calculating performance pay by counting the 10 months to Feb. 29 — before the impact of the virus was fully felt in the U.S. — separately from the last two months of its fiscal year.
As the pandemic drags on, and drags down company performance, expect more companies to make similar moves.
New York vs. the Trump Organization
The state attorney general of New York, Letitia James, is leading an inquiry into whether the Trump family company committed fraud to win loans and tax benefits.
Ms. James asked a judge to compel the testimony of Eric Trump, one of President Trump’s sons and a top executive at the Trump Organization. Eric Trump had canceled an interview with her office last month, and the company said that it would not comply with seven subpoenas related to the investigation. The move reflects the company’s concerns that Ms. James’s probe could eventually shift from a civil inquiry into a criminal investigation, The Times reports.
At issue is whether the Trump Organization improperly reported its assets to lenders and tax authorities, according to Ms. James’s filing yesterday. The inquiry began last year after Michael Cohen, the president’s former lawyer, told Congress that the company had inflated the value of its holdings to get bigger loans and understated them to reduce real estate taxes. It’s the latest legal headache for the Trump family business, as the Manhattan district attorney, Cyrus Vance Jr., investigates potential bank and insurance fraud by the company and seeks to obtain the president’s tax returns.
The speed read
• Ant Group, Alibaba’s financial affiliate, filed for its hotly anticipated I.P.O., revealing a profit of $3.2 billion in the first half of the year, among other details. (CNBC)
• LVMH and Tiffany have reportedly given themselves until November to close their $16.2 billion deal; the previous deadline was yesterday. (Reuters)
• Investors in a SPAC backed by Dan Loeb’s Third Point voted to complete its $2.6 billion takeover of the payments company Global Blue, months after Third Point tried to walk away. (Reuters)
Politics and policy
• American and Chinese officials met by videoconference to discuss the status of their trade deal and issued upbeat statements. (NYT)
• Why President Trump’s approval ratings on the economy have remained stable: Supporters point to recent stock-market gains and are less likely to have lost their jobs during the pandemic. (NYT)
• A federal judge said that she is inclined to let Apple ban Fortnite, Epic Games’ blockbuster title, from its App Store, but not to let it withhold key developer tools. Microsoft has backed Epic’s legal fight. And here’s a profile of Tim Sweeney, Epic’s C.E.O. (@markgurman, FT, NYT)