Back in SPACs

We have to hand it to AC/DC.  The opening lyrics to “Back in Black”, fit yesterday’s Nasdaq debut of Vinfast (VFS) to a tee – especially if you change “sack” in the second line to “SPAC”:

Back in black
I hit the sack [SPAC]
I’ve been too long, I’m glad to be back
Yes, I’m let loose
From the noose
That’s kept me hanging about
I’ve been looking at the sky…

(Songwriters: Angus Young / Brian Johnson / Malcolm Young)

I have to admit, I’d pretty much forgotten about SPACs until I saw the performance of VFS yesterday.  When you examine the chart below, keep in mind that its predecessor, Black Spade Acquisition Corp, a Hong Kong-based SPAC, closed at $10.45 the day prior:

VFS, 2-Day Chart, 2-Minute Bars

Source: Interactive Brokers

The stock came to my attention yesterday when it had sequential halts for volatility shortly after it began trading.  Those early dips, on some quite understandable early profit-taking, proved to be wonderful “buy-the-dip” opportunities for those who took advantage of them.  The final, late push higher caused the stock to close over 250% above its prior day’s level.  Although VFS is currently down about 20% this morning, it is still above yesterday’s value weighted average price (VWAP) of $27.27.  There were several winners, not least of whom is the company’s chairman, Pham Bhat Vuong, who instantly became Vietnam’s richest person.

For those of you who slept through the equity mania of mid-2020 through 2021, the acronym “SPAC” stands for Special Purpose Acquisition Company.  The principle behind a SPAC is this: a sponsor organizes a company with the express intent to purchase another company and raises money by issuing stock – usually at $10/share.  The acquiree is unspecified since there is a statutory time limit before which the SPAC can approach a potential target.  If the SPAC fails to complete an acquisition within a specified period – usually two years, though it can be extended – it returns the funds it raised to shareholders and vanishes.

In theory, the SPAC sponsor has expertise in one field or another that will allow them to add value to the acquired enterprise.  In reality, what we saw all too often in 2020-21 was a parade of seasoned executives joined by a rogue’s gallery of the modestly qualified alongside, hucksters, social media darlings, and famous names who may or may not have brought business expertise to the table. 

SPACs were in many ways wonderful financial arrangements for their sponsors during their heady heyday.  We had a wave of new investors, many flush with stimulus checks, which made it a terrific environment for someone with either solid or dubious qualifications to essentially say, “Invest in my company.  We don’t actually have a business yet, but trust us, we’ll find something cool.  Sure, you can get your money back at the end if we fail, but we’re really incentivized to finalize a transaction – any transaction – and you’ll be better off as a result.”

Unfortunately, things didn’t work out as well as promised for all too many SPACs.  Some quietly closed.  (To be fair, I bought several that were unable to find deals at discounts and got paid at $10 or more within a few months.  It was like buying a CD.). All-to-many paid bull-market prices for acquisitions that proved much too high when markets cooled in 2022.  The performance of the IPOX SPAC index shows the product’s staggering rise and subsequent fall:

IPOX SPAC Index, Daily Chart Since Inception

Source: Interactive Brokers

With 20/20 hindsight, VFS had all the hallmarks of a successful launch.  Despite some recent setbacks, the EV auto space is at the forefront of investors’ minds.  SPACs with high-tech themes like EVs and space travel captured investors’ initial enthusiasm.  BSAQ may have also benefitted from being Hong Kong-based.  Last year we saw some wild upswings in small stocks from that region, most notably AMTD Digital ADRs (HKD). 

The question now is, “what next?”  VFS is now worth more than Ford (F) and XPeng (XPEV), among others.  But even if one believes that it is overvalued, it is currently difficult, if not impossible, to sell short.  There is an old saying that “markets can remain irrational longer than you can remain solvent.”  Even if you believe that VFS is wildly overpriced, its small float and current, well-earned enthusiasm can allow it to maintain a lofty price for quite some time. 

It’s hard to say that SPACs are really back for the long-term, but VFS gave us quite a reminder of their heyday this week.