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Money Stuff: Big SPAC Deals Don’t Need Big SPACs

April 13, 2021

SPAC SPAC SPAC

One thing about the biggest SPAC deal ever is that it doesn't involve a particularly big SPAC. Grab Holdings Inc., the Southeast Asian tech unicorn, is merging with Altimeter Growth Corp., a U.S.-listed special purpose acquisition company. The deal gives Grab about a $40 billion equity value, and Grab will raise $4.5 billion. That is sort of in the normal zone for companies going public: In a typical initial public offering, a company might sell 10% to 20% of itself to new investors; here the number is about 11%.

But the SPAC itself — Altimeter Growth — is only a $500 million pot of money. That's a big pot of money, but not all that big in the context of the modern SPAC boom; the record is Bill Ackman's $4 billion SPAC. Altimeter's $500 million SPAC will buy just 1.3% of the public company.[1] The remaining $4 billion will come from other big investors — including the sponsor of the SPAC — who will invest alongside the SPAC in a PIPE, a private investment in public equity. From the press release:

Proceeds include more than US$4.0 billion of fully committed PIPE led by US$750 million from funds managed by Altimeter Capital Management, LP

Investors in the PIPE include funds and accounts managed or advised by BlackRock, Counterpoint Global (Morgan Stanley Investment Management) and T. Rowe Price Associates, Inc., as well as Fidelity International, Fidelity Management and Research LLC, Janus Henderson Investors, Mubadala, Nuveen, Permodalan Nasional Berhad and Temasek  

Altimeter Capital Management, a venture-capital and public-tech-equity investing firm, is the sponsor of Altimeter Growth Corp., the SPAC. It will put in $750 million from its private funds alongside the $500 million that it raised from public investors in the SPAC. And BlackRock, Morgan Stanley, T. Rowe, Fidelity and other big public-market investors will also buy into Grab alongside the SPAC pool; their combined investment will be much bigger than what's in the SPAC.

Also, the public SPAC investors have withdrawal rights: If they don't like the Grab merger, they can redeem their SPAC shares for $10 each instead of getting Grab shares. Altimeter has agreed to backstop those withdrawal rights: If the SPAC ends up with less than $500 million (because of withdrawals), Altimeter will make up the difference.[2] This is unlikely to matter much, since the SPAC's shares were trading north of $13 this morning; investors seem to like the deal. But in theory 100% of the money here could come from the committed PIPE investors, with 0% of it coming from the SPAC.

One theory of SPACs is that they democratize and disintermediate the IPO process. In a traditional IPO, companies raise money from institutional investors; the companies and their banks choose the investors who get allocated shares in the IPO, and retail investors often miss out. With a SPAC, anyone can buy shares in the SPAC — they trade publicly on the stock exchange, generally for months before a deal is announced — and so can get in on the ground floor when a new company goes public. There are downsides to this; for instance, getting in on the ground floor generally involves buying SPAC stock before you know which company it will take public.

But in a world in which SPAC deals often involve PIPEs that are much bigger than the SPACs themselves, I am not sure that any of that matters, or that it describes the actual economics of SPAC deals. Grab is not really going public by selling shares to a pot of money that anyone can participate in: It's going public mostly by selling shares to BlackRock and T. Rowe and Fidelity, the same big investors who'd be at the top of any IPO; a small chunk of the deal (roughly 10% of the deal, or roughly 1.3% of the market cap) will go to the SPAC investors. Nor is Grab really raising money from people who put money into a pot blindly: It's raising money mostly from big investors who agreed to participate in a negotiated deal directly with Grab. BlackRock and Fidelity and T. Rowe did not give anyone a "blank check" to go out and take a company public; they just wrote checks to Grab, because they like Grab.

I wonder sometimes why you even need the SPAC. This deal, for instance, would arguably be more efficient if the SPAC had only $50 million instead of $500 million in its pool. At $500 million, Altimeter has to backstop a large and uncertain amount of potential withdrawals, tying up cash that it will probably never actually invest; at $50 million, that backstop could be less (or they could just skip it), and they could raise the extra $450 million directly from PIPE investors. The point of the SPAC is not really to provide cash for Grab; the point of the SPAC is to provide a listing. The SPAC has done an IPO, it's a publicly listed company, and it provides a mechanism to make Grab publicly listed. The cash in the SPAC is an afterthought.

SPAC warrants

A rough general rule in U.S. generally accepted accounting principles is that if a company has a variable liability — if it might owe different amounts of money in different circumstances — then it needs to mark that liability to market through its income statement. So if you issue bonds that are indexed to the S&P 500 — they pay back, say, $1 per point of the S&P 500 at maturity — then as the S&P 500 goes up the value of the bonds goes up, and you have to reflect that change as a loss in your income statement. If you issue $300 million of these bonds when the S&P is at 3,000, and the S&P goes to 4,000, then the bonds are worth $400 million and you have a $100 million loss. This makes sense: You owe more money, so economically your income has gone down.

This rule does not, however, apply to one particular sort of variable liability, which is one denominated in the company's own stock. If a company issues a convertible bond — a bond that converts into its stock — and then the price of its stock goes up, the value of the convertible bond will also go up. If you issue a convertible bond at $1,000, and your stock doubles, the bond might be worth, say, $1,800.[3] If this were treated as a variable liability, the company would have an $800 loss in its income statement: It issued a liability, the value of the liability went up, so the company has a loss.

But this is not generally how convertible bonds work.[4] The growing liability does not reduce income,[5] because it is not really a "liability"; it is just an obligation to issue shares, and a company's own stock is not a liability. If the company owes someone a fixed amount of its stock, that is just "equity," not a "liability." And so obligations to issue fixed amounts of stock — convertible bonds, warrants, employee stock-option plans, etc. — are not generally marked to market through the income statement. This also makes sense: It would be weird for a company's net income to go down just because its stock went up.

There are exceptions to that exception, though. Basically accountants are suspicious of the exception, and if something looks kind of like a variable liability and kind of like equity, they will be inclined to classify it as a variable liability and make companies mark it to market. So if your convertible bond or warrant has unusual features that make it un-equity-like — if you might have to pay it off in cash in some circumstances, even if those circumstances are sort of arcane and unexpected — then accountants may tell you to mark it to market.

In addition to that general accountant suspicion, the U.S. Securities and Exchange Commission is particularly suspicious of special purpose acquisition companies. SPACs normally issue warrants, which are a key component of the economics of a SPAC: If you buy into a SPAC early, you get both a share of the SPAC and also a fraction of a warrant to buy another share if the SPAC performs well. The SEC, suspicious of SPACs, turned loose its accountants, suspicious of warrants, on SPAC warrants, and got the expected result:

U.S. regulators are throwing another wrench into Wall Street's SPAC machine by cracking down on how accounting rules apply to a key element of blank-check companies.

The Securities and Exchange Commission is setting forth new guidance that warrants, which are issued to early investors in the deals, might not be considered equity instruments and may instead be liabilities for accounting purposes. The move, reported earlier by Bloomberg News, threatens to disrupt filings for new special-purpose acquisition companies until the issue is resolved. ...

The SEC began reaching out to accountants last week with the guidance on warrants, according to people familiar with the matter. A pipeline of hundreds of filings for new SPACs could be affected, said the people, who asked not to be named because the conversations were private.

"The SEC indicated that they will not declare any registration statements effective unless the warrant issue is addressed," according to a client note sent by accounting firm Marcum that was reviewed by Bloomberg.

Here is the guidance, and honestly even for accounting guidance about liability-versus-equity classification it's kind of nitpicky. A sample:

GAAP further includes a general principle that if an event that is not within the entity's control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. However, GAAP provides an exception to this general principle whereby equity classification would not be precluded if net cash settlement can only be triggered in circumstances in which the holders of the shares underlying the contract also would receive cash. Scenarios where this exception would apply include events that fundamentally change the ownership or capitalization of an entity, such as a change in control of the entity, or a nationalization of the entity.

We recently evaluated a fact pattern involving warrants issued by a SPAC. The terms of those warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.

It's fine for your warrant to say "if the company is acquired in a merger or tender offer in which 100% of shares are converted into cash, the warrant will also be converted into cash based on the acquisition price." (Really, the warrant has to work that way.) You might think that an acquisition of more than 50% of the stock is effectively the same thing — a fundamental change in ownership — so you might carelessly write "if the company is acquired in a merger or tender offer in which more than 50% of shares are converted into cash, the warrant will also be converted into cash based on the acquisition price." But, oops, nope, that makes it a variable liability!

One upshot of this is that some number of existing SPACs apparently have these weird warrants that should be classified as liabilities. This is no fun for them: They will have to revise their financial statements to properly account for the warrants, and the result will be that, as long as the warrants are outstanding, their net income will go down every time their stock goes up. (And it will go up every time the stock goes down.) Lots of SPACs go public with zero or negative net income, so I suppose investors will forgive them for another weird non-cash charge, but it will be administratively annoying and hard to explain.

Another upshot is that SPACs that haven't yet gone public will have to have their bankers and accountants and lawyers look extra hard at their warrants to make sure they aren't accidentally treated as liabilities. And the SEC, which reviews registration statements, will also look extra hard at the warrants to see if there are any more nits to pick, which might delay SPAC listings.

We talked yesterday about a speech by John Coates, acting head of the SEC's Division of Corporation Finance, warning SPACs that if they give investors projections of future income, and those projections turn out to be wrong, they will get sued more than they currently expect, and he will not feel sorry for them. It is a weird speech in that its main message is not about what the SEC is doing or will do; rather, it is advice for plaintiffs' lawyers about what theories they should use if they want to sue SPACs. The SEC clearly doesn't like the current SPAC boom, but it can't just ban SPACs, and even changing the rules to make life harder for SPACs would be difficult. But there are a lot of rules already, and the SEC can just hunt through the existing rules to find some weird ones that might make life harder for SPACs. It seems to be doing that pretty effectively.

MicroStrategy

Sure whatever:

MicroStrategy Inc. is pivoting to payouts in Bitcoin for its four independent directors, marrying management closer to the software maker's strategy of investing in the largest cryptocurrency.

Compensation fees for each board member will be based in U.S. dollars and will be converted into Bitcoin during the time of payment. The move is the software-analytics developer's "commitment to Bitcoin given its ability to serve as a store of value," the Tysons Corner, Virginia-based company said in a filing.

Last year MicroStrategy paid a total of $800,000 in cash fees to non-employee directors, so this is not hugely material or anything, but I guess it's a good PR stunt. ("Shares in MicroStrategy jumped as much as 4.9% to $745.94 in New York trading.")

It would be more interesting if, instead of committing to pay its directors a fixed number of dollars (but delivered in Bitcoin), it committed to pay them a fixed number of Bitcoins. "We'll pay our directors three Bitcoins a year": Now you've got something! One thing that you'd have would be directors who are effectively long Bitcoin: If Bitcoin prices double, serving on MicroStrategy's board would be extra lucrative; if Bitcoin falls to zero, it would be totally thankless. MicroStrategy's directors presumably approved its move to become a box of Bitcoins; if they want to bet shareholder money on the price of Bitcoin, betting their own compensation on that price seems to align incentives. 

Another thing that you'd have is MicroStrategy effectively being short some Bitcoin — if Bitcoin goes to $1 million, paying four directors three Bitcoins a year would be expensive — but it's so long Bitcoin otherwise (with over 90,000 Bitcoins at last count) that this is not a problem. It's a hedge. If your assets are all denominated in Bitcoin, it makes sense to have some liabilities denominated in Bitcoin too. As a hedging-of-risk matter, sure, but also as a symbolic matter. If your view is "we are investing our corporate treasury in Bitcoin because it is the currency of the future and will be better than the dollar in the long run," the way to express that view is not to buy all the Bitcoins you can find, put them in a pot and stand back and admire the pot. The way to express that view is to use Bitcoin as a currency, to have contracts denominated in Bitcoin, both as a payer and as a receiver, to bet not only that you will want to keep getting Bitcoins but also that the people you do business with will want to get them too.

Elsewhere:

Investment banking giant HSBC has confirmed banning customers of HSBC InvestDirect from buying MicroStrategy shares due to bitcoin concerns.

"HSBC has no appetite for direct exposure to virtual currencies [VCs] and limited appetite to facilitate products or securities that derive their value from VCs," an HSBC spokesperson told The Block.

If MicroStrategy is less of a software company and more of a box of Bitcoins — if it is effectively a way for retail investors to buy Bitcoin exposure on the stock exchange without messing around with wallets or crypto exchanges — then a bank that doesn't want its customers to invest in Bitcoins might not want them to invest in MicroStrategy either.

Oh come on

As far as I can tell the way most non-fungible tokens work is[6]:

  1. There is some normal commercial transaction. A band writes and records a song, which a record label releases, and the band and label receive royalty payments from Spotify. A professional basketball player does a good basketball thing at his job playing basketball; this good basketball thing is captured on camera and aired on a television network that pays the National Basketball Association zillions of dollars for the rights to show basketball. The New York Times publishes an article to its paying subscribers, serving up ads alongside the article. Jack Dorsey tweets a tweet on Twitter, the social network that he founded and that has made him a billionaire.
  2. Someone — perhaps a party to the original commercial transaction (the band, the record label, the NBA, the broadcast network, the Times, Jack Dorsey, Twitter), perhaps not — "mints" an "NFT," that is, they create a unique[7] and immutable digital record, preserved on a blockchain, pointing to the commercial transaction and saying "boy howdy that commercial transaction sure did happen."
  3. Then the person who minted the NFT sells it to someone else for a lot of money.
  4. The person who buys the NFT now owns a string of numbers on a blockchain that says "huh that other transaction occurred."
  5. The buyer generally owns nothing else: not the copyright to the basketball highlight, not the ability to go into Jack Dorsey's Twitter account and delete his tweet, nothing.[8] 
  6. I mean. Yeah.

So we talked the other day about how Justin Sun, a crypto guy who loves NFTs, called up art auction house Christie's and asked to buy some NFTs. Christie's didn't happen to have any NFTs, so they sold him a Picasso. Christie's was rather proud of this cross-selling, but I thought it was a missed opportunity. I wrote:

Look, I appreciate the effort, but if I were the Christie's team I would have said "Hang on, we have a nice Picasso, let me mint an NFT of it." Go make an NFT saying "this NFT entitles the bearer to absolutely no rights to Picasso's 'Femme nue couchée au collier (Marie-Thérèse),'" put it on the blockchain, sell it to the guy for $21 million — because, remember, he wants NFTs, not Picassos — and then go sell the actual Picasso separately to someone else for $19 million. Then someone who likes paintings would own the Picasso, someone who likes NFTs would own the NFT of the Picasso, and Christie's would collect two fees. 

Again, that seems to be the core idea of an NFT. You sell the Picasso to someone else, and then you sell a sort of digital commemoration of the Picasso to the guy who likes NFTs. I'm sorry. I realize this is utter nonsense. And yet. We talked earlier about a company that bought a Banksy painting, destroyed it, and then sold an NFT of the whole thing. If you buy that NFT, you don't get the Banksy painting, but you do get a digital commemoration of the fact that somebody else once had the Banksy painting. That's the correct way to do it.

Anyway if this is an April Fools' joke it's like two weeks late:

It's a major milestone when a company lists on the NYSE and begins trading for the first time. 

Today, we're celebrating that moment by launching NYSE First Trade NFTs. 

Why are we doing this? 

We love to celebrate moments at the NYSE. 

So, we are launching our own NYSE First Trade NFTs as a fun way to mark the instant a company joins our community.

How do our NFTs work? These non-fungible tokens memorialize a company's First Trade using the blockchain's digital ledger and provide irrefutable proof of authenticity and ownership.

The First Trade is the exact moment a company becomes public, creating an opportunity for others to share in its success.

We're taking the "First Trade Slips" for six NYSE listings and minting them as non-fungible tokens on the blockchain.

That is from the New York Stock Exchange's Twitter account; it links to this NYSE web page, which absolutely doesn't explain anything more clearly:

When we decided to mint the NYSE's first NFTs it was fitting that we chose to memorialize that particular one-of-a-kind moment.

Our first class of NYSE NFTs celebrates the First Trades of these notable listings: Spotify, which executed the first ever Direct Listing, Snowflake, Unity, DoorDash, Roblox and Coupang, the largest U.S. IPO so far this year.

Basically, if you bought Coupang Inc. stock in its first trade, you got Coupang stock — an ownership stake in the company, a claim on future dividends, status as the beneficiary of certain fiduciary duties, some voting rights, etc. If you sold Coupang stock in its first trade, you got $63.50 per share. Sure, fine, both of those things — Coupang stock and U.S. dollars — are a little imaginary; you can't eat either of them. But they are imaginary in conventional and useful ways. Widely distributed economic ownership of residual claims on corporate assets allows for efficient financing of projects. U.S. dollars can easily be traded for food, which you can eat. These are useful abstractions that grow out of real economic relationships.

If you buy an NFT of Coupang's first trade, you do not get the Coupang stock. As far as I can tell you just get a commemoration of the fact that somebody else bought Coupang stock. Why would you want that? Shoot, man, I don't know, that's just how NFTs work.

Things happen

Secrecy and Abuse Claims Haunt China's Solar Factories in Xinjiang. How Payment Processor Stripe Became Silicon Valley's Hottest Startup. Banks, After Bracing for Disaster, Are Now Ready for a Boom. Consumer Prices in U.S. Advance by Most in Nearly Nine Years. COVID-19-Related Securities Suit Against Norwegian Cruise Lines Dismissed. Bitcoin Rallies to All-Time High as Traders Eye Coinbase Listing. Day Traders Know a Bubble When They See One, and They Want In. "I Just Like the Stock" versus "Fear and Loathing on Main Street": The Role of Reddit Sentiment in the GameStop Short Squeeze. "I'd say my dogs' lifestyle has changed more than mine." 

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[1] There's a pro forma cap table on page 49 of the investor presentation; SPAC shareholders will own 50 million shares out of 3,955.2 million total.

[2] See the discussion of the "Backstop Subscription Agreement" in the 8-K.

[3] When you issue the bond for $1,000, it is generally convertible at a premium: Day one it can be converted into only, say, $700 or $800 worth of stock. (It's worth $1,000 because it is also a bond, it has optionality, etc.) When the stock doubles, now it can be converted into, say, $1,400 or $1,600 worth of stock. (It's still worth more due to option time value.) 

[4] It sometimes is. There are occasional (generally cash-settled) convertibles that are marked to market; some companies just don't care about the accounting weirdness.

[5] It might reduce earnings per share, because you'll have more fully diluted shares in the denominator for that calculation.

[6] I am exaggerating a little for effect, and many major forms of NFT — CryptoKitties, much digital art — do not have the underlying real-world commercial transaction. But I want to press on the ones that *do* have that underlying transaction, because they are especially absurd.

[7] Unique in some narrow sense; the record itself is not copyable. Nothing prevents multiple people from making multiple records all pointing to the same commercial transaction.

[8] Sometimes the buyer gets some extra gifts thrown in, but they are not an integral part of the NFT concept. Also they are not part of the *NFT*: The extra gifts don't live on the blockchain with the non-fungible token.
 

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