On May 15, 1997 Amazon floated its shares to the public at $18. If you purchased $10,000 worth of the stock on IPO day you’d have holdings worth roughly $12 million now. That very few can lay claim to having made this investment speaks to how great the skepticism was about Amazon 24 years ago.
Rest assured that the next 1,200x your investment opportunity likely exists in the stock market as you read this, but it’s not obvious. If it were, investing would be easy.
In 1999 internet grocer Webvan floated its shares in the $13-15 range. The shares surged 65% on IPO day for a company that investors felt had a lot of promise. Two years later Webvan filed for bankruptcy.
There are many lessons here. The first, rather obvious one, is that political types knew not of what they spoke back in the first internet boom. At the time, they were clamoring for “Mom & Pop” to get access to IPO shares in much the same way that “insiders” were. When the vast majority of those internet companies went bust in 2001, political types changed their tune. Very quickly.
Amazon vis-à-vis Webvan is a loud reminder of how intensely uncertain the stock market is. This is particularly true for relatively new public companies. The future is more than opaque, which is one of many reasons why investment banks don’t go out of their way to include retail investors in their IPO share allocations. They’re doing those retail investors a favor.
Indeed, Amazon is the exception to the Webvan rule in the marketplace. Big, institutional investors can and do take IPO risks that “Mom & Pop” would be wise to avoid. That it would be exceedingly hard to find retail investors who purchased $10,000 worth of Amazon shares on IPO day explains why.
Which brings us to all the excitement in the media about SPACs; aka special-purpose acquisition companies. SPACs are public companies without an underlying business. An investor buys shares in the SPAC based on the latter’s plan to purchase a certain kind of private company. Given all the regulations related to IPOs today, SPACs are a way for private companies to go public without some of the regulatory headaches.
Some say SPACs are a way to bet on the jockey as opposed to the horse, but it could just as easily be said that they’re a consequence of high investor interest in today’s horses. Here’s a way to attain their shares sans the typical IPO challenges.
Despite this, there’s no alteration of traditional market realities. Newly public companies are risky investments for many reasons, but most notably because their newness means they’re a bet on a future that’s vague. Which means SPACs are risky. They are because they’re just another way for generally younger private companies to go public.
Which was why a recent Wall Street Journal headline was so predictable and puzzling at the same time. “Insiders Gained in SPAC Deal While Investors Took Losses.” On page A1, and above the fold, the headline in an article penned by Amrith Ramkumar was a statement of the obvious.
With newly public companies insiders are logically going to enjoy gains precisely because they have shares that others want. They're selling a bit of their future in return for dollars right now.
At which point the investors who’ve purchased shares are taking a risk. They could have bought the next Amazon, and with that, a 24-year roller coaster ride that ends (?) in glory, or they may have invested in a future that markets will soon reject. Yes, another Webvan.
Ramkumar writes of “a growing gap between returns for insiders and later investors,” but it really all depends. No doubt the insiders at Webvan felt fortunate to have sold some of their shares early back in 1999. Amazon’s insiders doubtless regret that they sold so cheaply relative to what Amazon became. Markets are risky. Get it?
Ramkumar would give the impression that SPACs are just some way for insiders to profit off of the gullibility of investors, but such a view presumes that that buyers of SPACs are newbys just desperate to be fleeced. In truth, these are sophisticated institutional investors in most instances who are well aware of the risks that come with ownership of the relatively new.
As opposed to clueless dupes in the process of being steamrolled by savvy SPAC owners, the more realistic truth is that the investors are the alphas in the relationship. And they know what they’re getting into. Just as most IPOs don’t pan out, neither will most SPACs. Investors take the risks, including taking losses as SPAC “insiders” gain, because they plainly think the long-term gains from a few will paper over the losses from many.
Basically there’s no “there” to the Wall Street Journal’s insinuation about savvy SPACs running over innocent investors. In other words, markets work.