Starting in 2020, there has been a proliferation of transactions by special purpose acquisition companies, or SPACs, as an alternative to traditional mergers or initial public offerings (IPOs). SPAC mergers have become the trendiest IPO route for electric vehicles (EVs), beginning with Nikola’s IPO on June 4, 2020. Dozens more electric vehicle companies such as Lordstown Motors Corp, Fisker Inc, and Canoo Inc. have followed suit with their own SPAC mergers, with many more in the pipeline.[1] What exactly is a SPAC, and why have they become so popular for electric vehicle companies?
SPACs, also referred to as blank check companies, have existed for fifteen years. A SPAC is a shell company that initially has no commercial operations and is formed to raise capital through an IPO for the purpose of acquiring an existing private company. After the initial IPO, SPAC manager is typically given two years to find a target, otherwise the investor capital is returned to investors. During this two-year period, the SPAC seeks to acquire an existing privately held company through a reverse merger, and the shareholders of the target company become the majority shareholders in the surviving entity. The previously private company becomes a publicly traded company, and the merger is referred to as a de-SPAC transaction. This transaction serves as an alternative to the traditional IPO process on a stock exchange.
SPACs became very popular in 2020. There were 247 SPAC IPOs cumulatively valued at $75 billion in 2020 – far greater than in the previous 5 years combined.[2] By February of 2021, there had already been around 130 SPAC listings, which is more than the first nine months of 2020.[3]
There are a few reasons as to why SPACs have become so popular, especially among the electric vehicle sector this past year. First, SPACs allow privately held companies to go public faster than in a traditional IPO process – the timeline of a SPAC is usually three to four months, as opposed to six to nine months for a traditional IPO. Second, there is more certainty in raising capital. With traditional IPOs, pricing occurs the night before a company lists, resulting in a figure that may be heavily impacted by market volatility. SPACs, on the other hand, raise guaranteed funding early in the process to ensure enough money is raised for a successful acquisition.[4] This can facilitate the public offering process during periods of market instability and volatility as there is greater certainty in the pricing early on.[5]
Nikola took advantage of the market opportunity and went public through a SPAC merger on June 4, 2020 with a $3.3 billion valuation. Answering a question of why Nikola decided to go public with a SPAC, Nikola CFO Kim Brady said that “once we had locked in the PIPE investors and looked at the market volatility and Covid concerns in late February, it became clear to us at that point that having certainty, a strong valuation, and the ability to get the transaction done by June was very attractive compared to the IPO path."[6]
The most notable advantage of SPACs is that they allow companies which otherwise might not be marketable through a traditional IPO, such as pre-revenue companies, to go public. This is because, under the traditional IPO process, only historical financial statements can be disclosed under securities laws. SPACs, on the other hand, allow companies to market their businesses using forward-looking projections because they face less stringent regulations.[7] The deals are officially recognized as mergers rather than as more highly scrutinized public offerings.
The ability to use forward-looking projections is especially important for electric vehicle companies as many of these companies remain in the pre-production stage and have yet to launch commercial products. Neither Fisker, Lordstown, nor Canoo, each of which went public via a SPAC merger, had a single dollar of revenue in the past year.[8] However, they are forecasting $10.6 billion, $5.8 billion, and $1.4 billion in sales in 2024, respectively.[9] The ability for these EV companies to use projections allows them to tap into the public markets with a high valuation based on their projected growth and company vision rather than historical financial statements.
However, many of these company’s projections seem unrealistic.[10] EV companies such as Arrival, Faraday Future, and Fisker all project to reach $10 billion in annual revenue within approximately 3 years from zero initial revenue[11]. It took each of Facebook, Tesla, and Amazon over ten years to reach $10 billion annual revenue from zero revenue, and these aggressive EV projections have many short sellers on the watch. Nate Koppikar, the co-founder of hedge fund Orso Partners, is wary of absurd SPAC projections and claims that “they are often pump and dumps” and “100 percent helping create a bubble mentality.”[12]
SPACs will continue to be a valuable way for EV startups to tap into the public markets and obtain more capital for their businesses. The global electric vehicle market is valued at $162 billion in 2019 and is projected to reach $803 billion in 2027[13] as the demand for fuel-efficient, high-performance, and low-emission vehicles increases. Regardless of whether or not there currently is a bubble, the electric vehicle industry will be an important sector to follow as the public markets become more saturated with EV companies.
Footnotes
[1] https://insideevs.com/news/481681/list-ev-spac-completed-upcoming/
[2] https://www.skadden.com/insights/publications/2021/01/2021-insights/corporate/the-year-of-the-spac
[3] https://markets.businessinsider.com/news/stocks/spac-boom-record-year-blank-check-company-kaepernick-ackman-2021-2-1030073674
[4] https://equiniti.com/us/news-and-views/eq-views/going-public-why-companies-are-considering-spacs-instead-of-a-traditional-ipo/
[5] https://www.forbes.com/sites/allbusiness/2020/11/11/10-key-questions-and-answers-about-spacs/?sh=18c9bc282f83
[6] https://www.barrons.com/articles/u-s-stocks-set-to-open-higher-as-european-and-asian-equities-slide-51616149323
[7] https://www.forbes.com/sites/allbusiness/2020/11/11/10-key-questions-and-answers-about-spacs/?sh=18c9bc282f83
[8] https://www.barrons.com/articles/what-nikola-hyliion-and-6-other-ev-spacs-are-worth-51602894535
[9] Id.
[10] https://www.wsj.com/articles/startups-going-public-via-spacs-face-fewer-limits-on-promoting-stock-11609678800?mod=article_inline
[11] Id.
[12] https://www.institutionalinvestor.com/article/b1qqvy1pqh34s6/Free-of-IPO-Constraints-SPACs-Can-Make-Absurd-Financial-Projections-And-This-Hedge-Fund-Manager-Says-The-Fallout-Is-Coming
[13] https://www.alliedmarketresearch.com/electric-vehicle-market