SPACs: A Lifeline for Troubled Media Ventures?

SPACs: Lifeline Troubled Media Ventures?
Cheyne Gateley/VIP

It’s been a hot year for SPACs — special purpose acquisition companies — and SPAC IPOs. But while hitting the public market through a SPAC does have its advantages, the downside risks just may not be worth it, especially for media companies.

Some big-name businesses, like Virgin Galactic, DraftKings and Nikola Motors, have gone public through SPACs recently, and some have been a huge success. No wonder other brands are exploring their options, including struggling streaming service Quibi, which is considering going public through a merger with a SPAC, as was reported earlier this week.

There have been other small media companies expressing interest lately in merging with SPACs. Bustle Digital Group founder and CEO Bryan Goldberg predicted his own challenged venture would likely merge with a SPAC in the next 18 months, according to an interview with The Information.

But here’s the problem with Bustle. Sure, COVID hit most companies hard, and Bustle was no exception. The company saw revenue slashed in half at its peak, but Bustle was having issues long before the pandemic. Over recent years, it has aggressively acquired companies while cutting staff to reduce costs. It’s been a vicious cycle that emerged as a result of trying to be a high-growth company before achieving profitability.

And much like Bustle, Quibi has too many issues for a successful SPAC merger to make sense. The pandemic quarantine was supposed to benefit Quibi after its April launch, but founder Jeffrey Katzenberg subsequently blamed COVID for the mobile-only platform’s hugely disappointing performance shortly out of the gate.

Just a week after its launch, Quibi reportedly only had about 1.5 million active users, significantly less than previously anticipated. That left Quibi strapped for cash after dumping considerable money into licensing original content.

Companies usually opt to go public as a means to raise capital. A company like Bustle or Quibi is unlikely to be met with much enthusiasm with a traditional IPO, so the logical play would be to merge with a SPAC to raise the additional capital needed, all while avoiding intense scrutiny and a time-consuming roadshow to woo investors.

And now would theoretically be the ideal time to consider merging with a SPAC, also known as a blank check company. They have become all the rage this year as companies look to go public through a backdoor and avoid some of the Securities and Exchange Commission’s regulatory hurdles. As of Aug. 5, 60 SPACs raised $22.5 billion, according to institutional research and IPO ETF provider Renaissance Capital. That marked all-time highs in both count and proceeds. 

There are a few reasons for the SPAC boom of 2020, including historically low interest rates, ample liquidity, the rise of venture capital and private equity and heightened interest in high-growth companies. Furthermore, the recent market volatility caused by the pandemic made a traditional IPO more difficult, and thus SPACs took center stage. 

However, while SPAC IPOs can be successful, they are rare. According to Renaissance Capital, from 2015 to this July, SPAC IPOs have generally underperformed post-merger. Of the 223 SPAC IPOs since 2015, only 89 completed mergers and took a public company. And those 89 saw their stock fall an average of 18.8%, compared with an average aftermarket gain of 37.2% for traditional IPOs since 2015, Renaissance Capital pointed out.

Doesn’t sound ideal for the companies or the investors, and here’s where things get worse: The SEC has explained that it’s going to start taking a closer look at SPACs.

“For good competition and good decision making, you need good information,” SEC Chairman Jay Clayton told CNBC Thursday. “One of the areas in the SPAC space that I’m particularly focused on is the incentives and compensation to the SPAC sponsors. How much of the equity do they have now, how much of the equity did they have at the time of transaction?”

Clayton said the SEC wants to make sure investors have a full understanding when it comes to SPACs. This all comes after Nikola’s high-profile fall from grace. The electric truck company is being investigated by the SEC after short-seller Hindenburg Research alleged Nikola committed fraud by making false statements about its technology.

Nikola’s implosion thrust a spotlight on the negative outcomes that could result from SPACs. For instance, a key SPAC advantage can become a disadvantage. Unlike with traditional IPOs, SPACs are able to provide financial projections, including profit and sales growth, which could make a company look far more attractive to investors than it actually is. 

The risk of a major flop even after a SPAC IPO is extremely high. So while there are more protections in place now than in the 1980s for investors when it comes to SPACs, that doesn’t mean investors can overlook the challenges of these potential target businesses. There could be a reason they’re looking to go through a backdoor process like a SPAC IPO.