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Filling in the blanks

23 June 2020 By Lauren Silva Laughlin

Investors who want to buy companies that buy other companies are spoiled for choice. Goldman Sachs and Bill Ackman, who runs Pershing Square, are both launching so-called special purpose acquisition vehicles. But the two are very different. Goldman’s is smaller at $700 million. Ackman’s is a giant $6 billion, and adds some governance-friendly tweaks. Ackman has the edge, in ambition if nothing else.

A SPAC raises cash by selling shares, then acquires a company that wants to skip the traditional initial public offering. Investors vote on the acquisition, and those who reject it generally get their money back. The shares typically come with some warrants, which can be sold for cash or swapped for shares later if the enlarged company does well.

Picking a SPAC is usually about picking a backer. Goldman and Ackman both have pulling power in that sense. Ackman is putting his reputation on the line by pledging as much as $3.5 billion of funds from Pershing Square investors, which will include some of his own money, making his SPAC by far the biggest of his kind. He’ll get fees and kudos if that works well, and a pummeling if it doesn’t.

Ackman has also ironed out some commonly seen flaws. For example, usually a SPAC’s backers get 20% of the company as a reward when a deal closes. That can mean they’re better off doing a mediocre deal than none at all. Goldman’s SPAC has that risk. Ackman has done away with this feature, swapping it for the right to buy less dilutive warrants, which are only worth anything if the company’s value goes up by 20% or more.

Perhaps the biggest difference is Ackman’s plan to incentivize investors to stick around until a deal is done. Investors in his SPAC only get one-third of their warrants up front, and the rest once an acquisition is made. Those who don’t stay invested forfeit their unvested warrants to those who do. Hence his SPAC being named “Tontine,” after a kind of insurance policy where the entire value goes to the last survivor.

On the face of it, that gives added incentive to investors to approve an acquisition they may not love. They also stand to make less of a quick buck by selling their warrants at the get-go. Those in search of more certain and short-term profit might therefore prefer Goldman’s offering. Then again, if Ackman seriously believes he can deliver the goods, he should be happy enough to wave those investors goodbye.


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