Daniel Loeb, Founder and CEO of Third Point LLC
Jacob Kepler | Mayor Bloomberg | fake images
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The once red-hot SPAC market is becoming fertile ground for activist investors pushing for and profiting from changes in troubled companies.
A record number of companies have gone public in the past two years by merging with special purpose acquisition companies, an alternative fast-track IPO vehicle. Industry experts believe these companies, new to public markets and often underperforming, could become increasingly vulnerable to activist involvement.
“It makes sense that they would look at SPACs because often when a SPAC M&A happens, the stock is down 10% or 15%, even in the best case scenario,” said Perrie Weiner, partner at Baker McKenzie. LLP. “There may be buying opportunities and activists could do well. For SPACs, when they first get off the ground, it takes a while to get on their feet and sometimes the management teams aren’t as good as they should be.”
The performance of the SPACs after their mergers has been dismal. CNBC’s proprietary SPAC Post Deal Index, which is made up of SPACs that have completed their mergers and taken their target companies public, is down almost 30% so far this year and a whopping 50% from a year ago.
Last month, Dan Loeb acquired a 6.4% stake in Cano Health, an operator of care facilities for the elderly that has merged with Jaws Acquisition Corp., backed by billionaire Barry Sternlicht. view” of the SPACs.
Loeb’s move marked one of the first times a prominent activist investor has targeted a company that went public through a SPAC, but many expect more to come.
“We know that there are various activists evaluating potential targets now in almost every sector,” said Bruce Goldfarb, president and CEO of Okapi Partners, a proxy solicitation firm. “In some cases, the clock is already ticking for the next representation season, as active investors assess targets ahead of the nomination window for the next meeting to elect directors.”
While the rise of SPAC created a host of new targets for activists, it may not be easy for them to bring about change in the space due to the special structure of the board and management.
SPAC’s sponsors have board representatives who are very close to management and the sponsors also own about 20% of the company, giving them significant voting power, Goldfarb said.
Also, many of the startups have different kinds of voting power, making it difficult for other investors to influence the vote. Also, most of these companies have staggered boards, which means not all directors can be elected at the same time, he added.
“Companies that went public through SPACs are likely to be targeted by activists, especially if they continue to underperform, but it’s not like shooting fish in a barrel,” Goldfarb said.