PSTH: A Case of Financial Overengineering

With 2020 Special Purpose Acquisition Company (SPAC) deal-making volume up over 300% annually, the summer of 2021 was shaping up to be the summer of the SPAC. That was, until activist shareholders and government regulators set their sights on the largest SPAC deal to date: Bill Ackman’s Pershing Square Tontine Holdings (PSTH). Since then, it seems as if Wall Street’s once hottest investment trend has become a fad of the past. But does this mark the end of the SPAC craze, or is it an opportunity for one of Wall Street’s top financial engineers to give the SPAC model a much-needed reinvention?

Unlike traditional IPOs or direct listing, SPACs are a quick and flexible public-listing alternative that allow companies to publish their projected financial performance.

A Special Purpose Acquisition Company is a publicly-traded shell corporation used to acquire a private company, whose operations then become public as a result. Unlike traditional IPOs or direct listing, SPACs are a quick and flexible public-listing alternative that allow companies to publish their projected financial performance. This is especially valuable to start-ups that rely on their potential growth in order to raise capital.

Bill Ackman, hedge fund billionaire and CEO of Pershing Square Capital Management, capitalized on the frenzy by raising $4 billion in July of 2020 for his own SPAC. His project was called Pershing Square Tontine Holdings (PSTH) and was by far the largest deal of its kind to date. The promise of Tontine was that Ackman would find an attractive investment opportunity in a private company and, within the next two years, purchase this company before distributing its shares to his investors. The catch was that no one knew when or what that opportunity might be. PSTH investors were essentially placing a blind bet on Ackman’s ability to find a great deal and get the merger done.

PSTH investors were essentially placing a blind bet on Ackman’s ability to find a great deal and get the merger done.

By June 20th, 2021, Ackman found a target, albeit an unusual one. The French media company Vivendi SE agreed to spin-off Universal Music Group (UMG) and PSTH was set to acquire a minority stake. Recall that, as a SPAC, PSTH was expected to pursue a merger with the privately held company. The shares of PSTH should have eventually been replaced with the shares of the target business. Instead, Ackman’s vehicle would distribute the new Universal Music shares to its investors and remain listed with residual cash holdings of $1.5 billion to search for another merger target. This caught the attention of financial watchdogs who, in one fell-swoop, stuck “a dagger in the heart” of PSTH. The SEC no longer recognized its eligibility as a true SPAC under stock-exchange rules, and the deal was dead. To add insult to injury, Ackman was subsequently slapped with a shareholder lawsuit alleging PSTH has been operating as an illegal investment company.

But Bill Ackman, like many billionaire investors, is no stranger to regulatory resistance or shareholder conflict. Not to be discouraged by the seemingly major setback, Ackman sought to financially engineer a novel solution, and thus the SPARC concept was born.

The SPARC, or Special Purpose Acquisition Rights Company, alleviates many concerns regarding the uncertainty surrounding SPACs. It also addresses complaints regarding these vehicles’ management fee structures. Unlike a traditional SPAC, the SPARC does not raise capital through an underwritten offering in which investors commit money without knowing the company that the SPAC will acquire. Instead, the SPARC issues warrants, or the future rights to acquire its stock, which are exercisable once it has entered a definitive agreement for its merger. If the SPARC is approved by the SEC, all shareholders of PSTH will receive their original $20 per share along with new warrants allowing them to buy back into Ackman’s SPARC once an acquisition has been announced.

But will Wall Street move to adopt more of these SPARC vehicles, or will they revert entirely back to the more traditional IPOs?

Ackman has managed to temporarily resuscitate PSTH while simultaneously engineering a democratic public offering structure. But will Wall Street move to adopt more of these SPARC vehicles, or will they revert entirely back to the more traditional IPOs? The fate of his novel and complex financial instrument may hang with the fate of PSTH itself. Unfortunately, however, the deadline for this original SPARC to close a deal is approaching quickly. One way or another, it is safe to say that the historic SPAC craze of 2020 – 2021 has come to an end. The PSTH story exists as a reminder of all the opportunities and possibilities for innovation across global capital markets. And while the SPARC may not take over the industry, be sure to stay on the lookout for the next financial instrument that Wall Street pours billions of dollars into.

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