Is there no bottom to the SPAC mess?
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Image Credits: Nigel Sussman
For a brief moment earlier in the ongoing pandemic, it appeared that there was a solution for the backlog of richly priced startups that needed to provide their backers with liquidity: SPACs.
SPACs, or special purpose acquisition companies, are paper companies taken public with capital attached that then combine with a private entity, effectively bootstrapping startups onto the public markets.
That SPACs have a colorful history is to understate the case. But in 2020 to 2021, with startup capital flowing and high-profile backers aboard, some hoped that blank-check companies would rescue unicorns from private-market illiquidity. It was not to be. Some startups did go public via a SPAC, yes, but few brand-name unicorns, and in many cases, the blank-check debuts resulted in value incineration. Or worse.
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Recent news — from Bird’s potential delisting and the BuzzFeed employee lawsuit to the latest from Latch (more on that shortly) — has us wondering whether there really is a bottom to the mess that SPAC-led debuts left all over the public markets. Then we want to know who is to blame. Thankfully, we have receipts.
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The SPAC game of stock-market limbo
How low can you go? When it comes to the price of one stock or another, the answer is zero. Shares can’t go negative in terms of their market capitalization. But a company can have negative enterprise value, by which we mean that it has more cash than it has market cap and debt combined. This is not something to aspire to.
And yet when we consider Latch, a software-hardware hybrid focused on apartment buildings, we find an enterprise value of negative $127.84 million, per YCharts data. That’s pretty poor. Latch is today worth just under 90 cents per share after falling around 5.5% in early-morning trading.
But when it comes to SPAC-led debuts turning out to be lemons in cheap disguise, Latch is hardly running solo. Former scooter unicorn Bird has a market cap of just $135.73 million today, Dave is valued at $187.25 million, and BuzzFeed is worth around $220 million, while AppHarvest is worth a slim $307 million, again per YCharts data.
Leaning on the same data source, Latch’s market cap peaked at around $2 billion during its life as a public company. Bird was once worth nearly $2.5 billion. Dave reached a market cap of $5.3 billion before losing nearly all of its value. BuzzFeed was briefly a public unicorn before shedding value. And, finally, AppHarvest managed a value of around $3.7 billion at one point.
So what happened? As we’ve noted before, growth projections inside of SPAC investor decks were rosy, to say the least. That fact, combined with a marketwide revaluing of technology and tech-ish shares, did not help. But there’s even more.
Last week, we learned just how much trouble Latch is in. (And we’re familiar with the company — we covered it and even had its now-former CFO on an episode of Equity.) It is executing an investigation into its 2021 and early 2022 accounting practices, and the results are Not Good (emphasis: TechCrunch):
While the Investigation is ongoing, on August 19, 2022, based on the preliminary findings of the Investigation, the Audit Committee determined that the Company’s consolidated financial statements for 2021 included in the Company’s Annual Report [ … ] as well as the Company’s consolidated financial statements for the first quarter of 2022 [ … ] should no longer be relied upon as a result of material errors and possible irregularities relating to, among other things, the manner in which the Company recognized revenue associated with the sale of hardware devices during 2021 and the first quarter of 2022. Accordingly, the Audit Committee, in consultation with the Company’s management, has determined that the Company’s consolidated financial statements for 2021 and the first quarter of 2022 will be restated.
Let me be clear: That’s incredibly bad.
There was concern that SPACs were targeting companies to take public that were not ready. That lacked the controls required for such an effort. That maturity was being rushed, a sort of financial puberty accelerant that took some corporate kids and pushed them into the limelight without the proper prep. What happens when such work is rushed?
The SPAC experiment was a failure, but it was an avoidable one. The companies that took the SPAC route couldn’t manage a traditional IPO for good reason; they were not unicorns-in-waiting. SPACs didn’t aid strong companies with their public market debuts — they merely helped immature companies torch consumer capital.
Dave’s SPAC backers at the point of completion included “Tiger Global Management, with participation from Wellington Management, Corbin Capital Partners and Alameda Research.” Latch was promoted by Chamath Palihapitiya, with others throwing capital into the mix. It’s slightly hard to blame folks for losing their own money, but we often saw prior backers of companies chip into their SPAC combos, meaning that folks were talking their own book in hopes of selling it later. And anyone, even a backer, who was partly behind now-missed growth targets and the other messes in the market owns some of the blame.
There’s been precious little finger-pointing for the SPAC fiascoes. Perhaps there should be more.
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