SPAC's are on the chopping Block
By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets
Famed short-seller, Carson Block, released research this week that calls out SPAC’s as ‘the great present-day money grab’. Muddy Waters Research (MW), his firm has opened a short position in MultiPlan (MLPN), which was listed via a SPAC earlier in the year in a deal worth $11 billion dollars. The SPAC was founded by Michael Klein, a prolific user of these vehicles, so MW is not taking on the fringe of the industry.
Block has a good record for exposing fraud and unsustainable business models, for example, Luckin’ Coffee and Burford Capital. So, when a new position is announced by his firm, investors should explore their findings. I recommend that everyone reads this newest report that is salaciously named, ‘MultiPlan: Private Equity Necrophilia Meets The Great 2020 Money Grab’.
In essence, this position is an attack — not only on MultiPlan — but also on the idea of SPAC’s and Private Equity. The research alleges that either the SPAC did not do enough due diligence or that it did not care that the business is set to decline substantially. In effect, MW believes that MLPN’s business model is outdated, flawed, and in decline. As one can imagine, the stock did not respond well to this announcement.
This report also lays blame at the feet of MLPN’s previous four private equity owners, stating that this is a ‘fact pattern that usually means there’s little more than a corpse of business left’. A scathing but clearly biased take on a multi-trillion-dollar market. MW claims that a SPAC was the only way for Hellman & Friedman — the most recent PE owner — to ditch the company, although it is claimed that they did this only after paying themselves a chunky dividend. Basically, MW is calling MLPN a bad business that has driven its core customer away by being an exploitative and poorly run company. They are now allegedly covering up the gap this will leave in their books by using some financial gymnastics.
It actually does not matter that Block has gone after MLPN. It was predictable that someone of note would eventually take a stand against these vehicles in the year of the SPAC attack. I have practically been twiddling my thumbs, waiting for this news: it was inevitable. The question is how extensive is this rot? If MLPN turns out to be the only poorly selected SPAC acquisition, then the effect may be minimal. However, the tale of Nikola and previous frauds suggests that this is not an isolated problem.
There are too many SPAC’s and not enough targets. This is a recipe for disaster. Equally, the passing of MultiPlan from PE house to PE house also speaks to the oversaturation of that sector. This does not create an environment where good business can be moulded. The sad fact is that a SPAC does not need to merge with a good business to make money because of the very tiny amount they invest, often $25,000. This leaves SPAC investors in a dangerous position, as they end up with the possibility of a poor company well past its prime or one that is fraudulent.
The world does not need SPAC’s — an IPO or direct listing suffices. The best of these acquisitions should be able to go public without these vehicles, and the worst should never be able to get anywhere near a stock exchange. I, for one, hope that 2020 goes down as the pinnacle for SPAC’s and that 2021 is SPAC free.
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