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The blank-check bonanza has already reached mind-boggling heights, but now we seem to have jumped the shark.
A preliminary prospectus was filed last week by a company called Burgundy Technology Acquisition Corp. seeking to raise $400 million for a special-purpose acquisition company, or SPAC, an entity that seeks to raise money to acquire an unnamed company that is also known as a “blank check” company. Behind Burgundy is a familiar face for tech investors, though one that hasn’t been seen in a few years: former Hewlett-Packard Co. and SAP AG SAP, -0.50% Chief Executive Leo Apotheker, who will be co-CEO of Burgundy along with former SAP colleague James Mackey.
In case you don’t remember Apotheker’s reign as CEO of pre-spinout H-P, the important part of that brief period for these purposes is one of the worst acquisitions in tech: the $11 billion acquisition of a U.K.-based data analytics software company called Autonomy. Just a year after making that deal, H-P stunningly wrote off $8.8 billion of the purchase price and admitted it had substantially overvalued Autonomy, leading to lawsuits and charges on both sides of the Atlantic.
Apotheker was ousted after less than a year on the job, but Hewlett-Packard Enterprise Co. HPE, -0.19% is still dealing with the fallout, mostly in the form of endless litigation. It has already paid out $100 million to settle a shareholder suit and other lawsuits, including a civil case it filed in the U.K. and a criminal case in the U.S. are still ongoing.
While it would be foolhardy to hand a CEO with such a horrific acquisition on his résumé a blank check to have another try, the SPAC bonanza on Wall Street has grown so huge that anything is believable. After a wave of blank-check acquisitions made huge waves with the Robinhood crowd — Virgin Galactic Holdings Inc. SPCE, -5.63% , Nikola Corp. NKLA, +1.15% and DraftKings Inc. DKNG, +1.30% most prominent among them — there has been an unprecedented flood of filings.
All told, the SPAC-fest is like nothing Wall Street has ever seen, already setting an annual record for amount raised. So far this year, 57 SPACs have raised $21.3 billion in the IPO market, excluding overallotments; last year, a total of 59 blank check companies raised $12.1 billion, which was a record at the time.
At the rate new offerings are flowing into the Securities and Exchange Commission, we may already have beaten the record for number of SPACs with four-plus months to go in 2020. Since July 31 — a week ago, as of this writing — 14 blank check companies have filed to raise a stunning sum of $5.5 billion, according to Renaissance Capital. That wave follows a filing for the biggest blank check company yet, billionaire hedge-fund manager Bill Ackman’s $4 billion Pershing Square Tontine Holdings Ltd. PSTH.UT, +0.38%
“We’re about to break last year’s full-year SPAC IPO count of 59, the highest number in a year ever,” said Matthew Kennedy, a senior strategist at Renaissance Capital, a provider of IPO-focused ETFs IPO, -3.86% IPOS, -1.40%. “And based on recent filings, activity is only going to increase heading into the fall.”
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SPACs were created in the 1990s, an outgrowth of a far riskier vehicle popular in the go-go 1980s: the blind pool. Some blind pools were created and dissolved without making a single investment, leading to the eventual creation of the SPAC, the blank check company, which has tighter controls. The biggest protection is that in exchange for not knowing what company will be acquired, investors have the option at the time an acquisition is announced to decide to hold or redeem the initial investment at cost (plus accrued interest).
SPACs in general are a different proposition for investors because they are investing in the people running them, with no information or financial data on an acquisition target until a deal is struck. Renaissance noted in a recent blog post for subscribers that most SPACs fail to live up to the hype — the return so far this year is a bit over 4%, Kennedy said in an email, despite the wild gains for a few outliers.
Goldman Sachs in a recent report noted that most of these deals perform poorly over the longer term, after an acquisition is finally made, underperforming both the S&P 500 SPX, +0.06% and the Russell 2000 RUT, +1.59%
“During the 1-month and 3-month periods following the acquisition announcement, the average SPAC outperformed the S&P 500 by 1 percentage point and 11 percentage points, respectively, and beat the Russell 2000 by 6 percentage points and 15 percentage points, respectively,” Goldman wrote in the report. “However, the average SPAC underperformed both indexes during the 3, 6, and 12-months after the merger completion.”
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Recent high-profile SPAC acquisitions have started off well, but could struggle for any gains in the near term as the companies could be years away from making real money. One such example is much-hyped space tourism company, Virgin Galactic, which was taken public last year through a SPAC formed by venture investor and former Facebook Inc. FB, +1.19% executive Chamath Palihapitiya. Earlier this week, Virgin Galactic SPCE, -5.63% reported no revenue in the second quarter and again delayed its first trip to space for founder Richard Branson, while announcing that it will dilute its SPAC investors by issuing another 20.5 million shares.
Virgin Galactic, though, is a dream of an acquisition compared with H-P’s purchase of Autonomy, one of the worst acquisitions in Silicon Valley. And the myriad court cases and leaks about the process have shown that Apotheker was at the center of all of the problems.
As H-P was getting close to completing its bid for Autonomy, Chief Financial Officer Cathie Lesjak expressed concerns about the hefty price. Apotheker pushed forward, though, with H-P eventually buying a company that it has since accused of misrepresenting its financial performance by slipping hardware sales onto its balance sheet while selling itself as a “pure-play” software company.
After the deal was announced in August 2011 — along with Apotheker’s plan to spin off the hardware business — Chairman Ray Lane found out that many of H-P’s large investors opposed the deal, and that there had been discussion among some bloggers and financial analysts in the past about Autonomy’s aggressive accounting tactics, according to The Wall Street Journal. Lane also uncovered widespread concerns among senior H-P executives that Apotheker wasn’t right for the job, which lead to his dismissal just 35 days after the Autonomy deal was announced.
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At the civil trial last year in the case filed by HP Enterprise in the U.K. against Autonomy founder Mike Lynch and its chief financial officer, Apotheker said the Autonomy deal was “not a happy memory.” Lynch’s defense argued that H-P wrote off the deal in an aggressive move to blame its former leadership for mismanaging the integration of Autonomy, and to protect the credibility of then new chief executive, Meg Whitman. The outcome of that case is still in the hands of the judge, who has not yet made a decision since the trial concluded in January, an HPE spokesman confirmed.
In his testimony, Apotheker admitted that he had not even read Autonomy’s most recent financial results before signing the deal, which lawyers pointed out would have taken him about 30 minutes.
“I was running a $125 billion company, sir, and minutes are pretty precious,” Apotheker testified, according to a Business Insider report of the trial.
In case you haven’t been paying attention, the original H-P is no longer a $125 billion company, and the Autonomy deal is among the many reasons why. When Whitman was named CEO of H-P after Apotheker, she dealt with the mess by eventually blowing it up into different pieces, with Autonomy becoming part of the enterprise-tech business, HPE, and eventually having most of its assets spun out in a complicated joint venture with Computer Sciences Corp. that created DXC Technology Co. DXC, +6.47%. Another ill-fated acquisition hanging over the enterprise business was the nearly $14 billion deal for Electronic Data Systems in 2008, which also led to a massive write-down.
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DXC has lost more than three-quarters of its value in the past two years, and combined with the two entities that spun out from the original Hewlett-Packard — HP Inc. HPQ, +1.09% and HP Enterprise Co. HPE, -0.19% — they are all worth less than $50 billion combined. MarketWatch reached out to contacts in Burgundy’s SEC filing to speak to Apotheker, but did not receive any response.
SPACs are risky plays in general. Buying into a SPAC is a bit like buying a house without knowing the neighborhood or the style of architecture. Instead, you hand your down payment to a real-estate agent to pick a house for you, sight unseen, with the option to get your down payment back if you don’t like the house.
If you go that route, you better trust your real-estate agent. Trusting Apotheker to make an acquisition, though, is like purposefully choosing one whose claim to fame was buying “The Amityville Horror” house.
