There is a solid lesson that all investors need to keep in mind during hard times and good times alike. The stock market is not the economy, and the economy is not the stock market. Despite so much negative news and so much caution, the stock market has managed to bounce back handily from its lows on March 23. With the market having recaptured about two-thirds of its losses, before this week’s sell-off, the stock market is trying to price in a return to some form of normalcy.
If the stock market is back, one thing that has to occur is that there needs to be a market for initial public offerings. Most investors would just assume that only quality companies that are not speculative would dare to come public during a recession. Special purpose acquisition companies (SPACs), or “blank check” companies, are very speculative because they have no operations and the promise is to merge with or acquire an existing company.
On Thursday, May 14, 2020, there was a SPAC IPO of Jaws Acquisition Corp. (JWS-UN). This company was formed for the purpose of entering into combination with one or more unspecified businesses. This was larger than most SPACs as it raised $600 million.
As with the traditional SPAC structure, the pricing of $10 per share at the IPO is actually a unit price, and each unit is made up of one Class A ordinary share. This particular SPAC also comes with a warrant for one-third of a share that entitles the holder to purchase one Class A share at $11.50.
While Jaws Acquisition would be classified as a speculative company by definition, the SPAC’s chair is Barry S. Sternlicht. The billionaire is the head of Starwood Capital, which manages tens of billions of dollars. Sternlicht is very well known and respected in the investing community. Jaws Acquisition’s chief executive officer is Joseph L. Dowling, who is also known in the investment community.
As with most SPACs, Jaws Acquisition’s target company (or companies) has not been limited to a particular industry, nor has it been limited in any specific geographic region to target for an acquisition. That said, the press release did indicate that Jaws Acquisition does not intend to pursue an acquisition in real estate, lodging or energy infrastructure assets. The prior U.S. Securities and Exchange Commission filing said:
We have not selected any business combination target and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any business combination target. We will not be limited to a particular industry or geographic region in our identification and acquisition of a target company. … We do not intend to target industries that are competitive with Starwood Capital Group Holdings, L.P.
The lead book-runner in the syndicate was Credit Suisse. Morgan Stanley and Citigroup acted as book-running managers for the IPO. As with most traditional IPOs, the underwriters were granted a 45-day option (overallotment) to purchase up to an additional 9,000,000 units at the initial public offering price.
It would be easy to interpret a SPAC IPO during a recession as some form of speculation gone wild. There is another side of that view that should also be considered. Most billionaires tend to know a thing or two about money and the markets, and maybe Sternlicht thinks there are some assets out there that can be acquired very cheaply.
Maybe things really are starting to go back to some form of normalcy, despite so many people not wanting to leave their homes, and despite millions of people having no job to go back to.
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