The road to Wall Street for promising young companies used to involve chartered jets, presentations to major investors such as mutual funds, and an anxiety-producing stretch during which investor consensus about how much the company was worth helped determine what the share price would be when the stock began trading.
That was the traditional process for an initial public offering. But this year, a growing number of Massachusetts companies are taking a shortcut to the stock exchange. They’re being bought by SPACs, or special-purpose acquisition companies, that are already traded on the market.
SPACs are sometimes called “blank check” companies, because they have money but no business operations. According to AGC Partners, a Boston investment bank, creation of these SPAC entities has hit a record high. In the third quarter so far, they have collected $20 billion in capital, an increase of 150 percent from the prior quarter, and have surpassed other types of stock market deals in volume.
DraftKings, the fantasy sports site headquartered in Boston, got to the Nasdaq Stock Exchange with an assist from a SPAC in April. Boston-based Cerevel Therapeutics, focused on developing drugs for Parkinson’s disease, announced it would sell itself to a SPAC in July, and in late August, Desktop Metal, a maker of 3-D printers in Burlington, said it would do the same.
Why are we seeing so much of this kind of action in 2020?
Ric Fulop, chief executive of Desktop Metal, took a prior company public the traditional way. That was A123 Systems, a maker of lithium-ion batteries for power tools and electric cars. It was one of the best-performing IPOs of 2009 — but the company filed for bankruptcy protection in 2012 following a big product recall, and its assets were sold off. But this is Fulop’s first time taking the SPAC route.
Desktop Metal makes machines that can turn digital designs into metal parts. The company’s first product, the Studio System, sells for about $60,000. Fulop’s cofounders include four MIT professors, and customers include Callaway Golf, Adidas, Goodyear, and Lockheed Martin. Ford’s head of manufacturing serves on Desktop Metal’s board, as does former General Electric CEO Jeffrey Immelt.
Fulop says it was always his vision to take Desktop Metal public. Of SPACs, he says, “we’re in a pandemic. This is a little more straightforward way to do it. We think it was a way to get to our goal of being a public company efficiently, where we could have more control.”
What does that mean, exactly? Fulop explains that instead of an investment bank deciding who will be the key investors for an IPO ― and discussions with those investors establishing a valuation at the eleventh hour of the process ― a SPAC allowed him to be in the driver’s seat, and sooner.
Fulop could assent to a deal with a particular SPAC — Trine Acquisition Corp. in New York — set his company’s valuation earlier in the process, and choose other investors who would put money into the transaction. In Desktop Metal’s case, those other investors include JB Straubel, cofounder of the automaker Tesla, and Chamath Palihapitiya, a former Facebook executive who last year was involved with taking the space tourism company Virgin Galactic public in a SPAC deal.
“Curating the investor pool ― that’s the number one benefit,” Fulop says, adding that he wanted investors who would hold the company’s stock over the long-term, “instead of hedge funds or people who would be flipping it.” Fulop says that while a SPAC deal might have been “seen as too novel” a few years ago, he was more open to the approach after watching companies like DraftKings and Virgin Galactic use it as their path to the public markets.
SPACs have “had an ugly past,” tainted by fraud and some lower-quality companies using it, says Jocelyn Arel, an attorney at the law firm Goodwin who focuses on SPAC deals. But she says “there have been some great companies that went public through SPACs,” including Smart Balance, the maker of healthy foods, a transaction she was involved with in 2004. Arel also notes that higher-quality investors are willing to be involved in SPAC deals these days; the mutual fund giants Fidelity Investments and T. Rowe Price are among those involved in the SPAC acquisition of Cerevel Therapeutics, which is expected to be finalized by the end of 2020. (Arel’s firm is working on that deal, which she would not comment on specifically.)
Two other benefits of the SPAC process: cash and speed, according to Ben Howe, chief executive of AGC Partners. With SPACs, “the seller is getting a ton more cash” once the deal is done, since the only asset in the publicly traded SPAC entity is cash, Howe says. With a traditional IPO, the company might sell 10 or 20 percent of itself, but 50 to 80 percent is more typical in a SPAC transaction, Howe says. And SPAC deals can get done in roughly three months, he says, while traditional IPOs can take twice that long.
Howe knows his stuff: In 2007, he engineered the creation of a SPAC that acquired an outsourcing company called Stream Global Services. SPAC creators are well-remunerated when the deal goes down — they put in 3 percent of the cash but own 20 percent of the SPAC entity once it becomes publicly traded.
The risk is that an acquisition needs to take place within two years of the creation of the SPAC entity.
Right now, Howe sees “a lot of competition” between private equity firms that want to buy promising private companies and SPAC entities that are out shopping. That competition is good for firms looking to go public — it increases the price SPACs are willing to pay.
Getting onto the Nasdaq market via a SPAC acquisition has worked out OK for DraftKings so far: Its shares began trading at $20 in April, when the deal was finalized, and they’re now worth about twice that.
Though Desktop Metal’s revenues are expected to dip in 2020 because of the pandemic, Fulop and Leo Hindery Jr., the CEO of Trine, view the future as bright. There are orders in the company’s pipeline, and Hindery says the cash infusion will let the company acquire other 3-D printing businesses. Fulop says that he wants to “build a fantastic franchise” with Desktop Metal, “continuing to grow something in Boston, for Boston.”
The deal between the two companies is expected to be done sometime in the fourth quarter, when Trine’s ticker symbol on the New York Stock Exchange, TRNE, will change to DM.