The Evolution of the 'Blank-Check Company'

Editor's note: Today, we're shedding some light on the current state of the SPAC market. Adapted from a Stansberry Venture Value special report, this piece was recently shared in the Stansberry Digest and has been edited for our audience. In it, our colleague Bryan Beach explains how the market ended up with a pile of left-for-dead SPACs... and a surprising opportunity.


Henry Villard – former Bavarian aristocrat, family outcast, and 19th-century American titan of industry – had one pesky thorn in his side...

A competitor threatened to topple the railroad and steamship monopoly he had established in the Pacific Northwest.

And so, in a move that would never fly in our modern regulated era, Villard began a clever plot to covertly take over his only regional competitor... Northern Pacific.

Villard began buying shares of Northern Pacific on the sly. But even with his vast wealth, he couldn't accumulate enough to gain control of the company. He needed to raise more money.

Villard knew that if he revealed his intentions, shares of Northern Pacific would skyrocket, and he wouldn't be able to get a controlling stake. So he devised a brand-new financial structure – one that would change the trajectory of public stocks for the next 200 years...

Villard christened this new structure the "blind pool." He sent out a newsletter, or "circular," to some buddies... asking them to give him money for a secret venture. In effect, these investors would buy a share of Villard's reputation.

His memoirs describe what happened next...

The effect of the circular was astonishing. The very novelty and mystery of the proposition proved to be an irresistible attraction... a regular rush for the privilege of subscribing ensued, and, within twenty-four hours of the issue of the circular, more than twice the amount offered was applied for.

The plan worked perfectly. Villard got his controlling stake and ended up with a near-monopoly on transport in the Pacific Northwest.

More than the man or the business, it's the blind pool that became the most important part of this old story. As the Los Angeles Times put it...

Someone on Wall Street ought to erect a statue to Henry Villard.

Villard made the discovery that if you don't tell investors how you're going to spend their money, they get more eager, not less.

This blind-pool concept evolved into something called a "blank-check company." Today, we call it a special purpose acquisition company ("SPAC").

You probably recognize the term. It became arguably the sexiest financial buzzword of 2020. That year alone, nearly 250 SPACs raised more than $83 billion from investors who paid up without any idea of what they were buying.

The SPAC momentum continued into 2021, with more than 600 SPACs raising around $163 billion. But the shine eventually wore off...

If you Google the word "SPAC" now, you'll find pages of articles with buzzwords like "bubble" or "greed" or "excess." In February 2022, things only got worse for SPACs. War broke out in Europe and investors fled uncertain markets. Since February 2021, the Bloomberg SPAC Index has fallen an incredible 80%.

And just yesterday, news broke that investment bank Goldman Sachs is pulling out of most SPACs it has taken public. With that, the SPAC boom has lost even more fuel.

It sounds bad. And it's proof that, 140 years after Villard's blind pool, a full-on SPAC bubble inflated – and then burst – in a little more than 18 months.

But investors can make a fortune by sifting through the scraps left over when bubbles burst. If you've got a contrarian streak, the next few quarters could be a defining moment.

A private company can go public in a handful of ways...

The most common way is through an initial public offering ("IPO"). Before even starting the IPO process, a company must invest considerable cash to beef up its finance, regulatory, and legal departments and spend a year or two scrubbing its past financial statements.

With its back-office ducks in a row, the company needs to find an investment bank to help connect it to potential investors. Then comes a rigorous "road show," wherein management pitches its story to would-be IPO investors in the hopes of finding enough interest to sell shares to the public.

SPACs are an alternative way to go public. With a SPAC, a "sponsor" – a modern-day Villard – raises a bunch of money to buy out an operating business. However, unlike Villard, SPAC sponsors often don't have a specific target in mind when they raise the money.

While raising the cash, sponsors go through the trouble of setting up a publicly traded shell company. They jump through all the regulatory hoops, set up all the legal entities, do their own IPO, and park the cash in the shell company's bank accounts. When the dust settles, the shell has a ticker symbol and can be traded in any normal brokerage account.

With the logistics out of the way, sponsors set out to find a private business with which to merge. Once the sponsors identify a target, negotiate a purchase price, and complete the merger, they can drop this operating business into the publicly traded shell.

For their hard work, sponsors get to keep 20% of the newly combined company. If they can't find a target within two years, the cash goes back to investors.

It's important to understand these dynamics. If the sponsors can find a target and complete a merger, they get 20% of an operating business. If they can't, all their efforts building out a public shell and raising cash are lost.

From the private company's perspective, the process of going public via a SPAC merger is quicker and cheaper than the traditional IPO process. A lot of the tough sledding has already been handled.

So in a perfect world, a SPAC transaction is a win-win for both the sponsors and the acquired business.

I've covered SPACs since launching my Stansberry Venture Value newsletter in 2017. But it's only recently that, despite a relatively long history, they became all the rage, ballooned, and then burst.

The SPAC boom was silly. But I believe the SPAC sell-off we're witnessing right now is also an overreaction. Tomorrow, I'll explain why so many SPACs go bust – and what that means for your money.

Good investing,

Bryan Beach

Editor's note: Now that this corner of the market has had its moment to shine – and came crashing back down – Bryan sees the opportunity of a lifetime. He has homed in on a specific and rare type of SPAC that has been punished unfairly... And he says when these few SPAC "diamonds" recover, investors could stand to make up to 1,000% gains in as little as two years. He's sharing the details in a brand-new interview... Check it out right here.

Further Reading

Many folks are pulling out of stocks right now as uncertainty fills the market. And with everything going on in the world today, there's no telling when the volatility will end. But history shows that better returns may lie ahead... Read more here: Stocks Are Becoming a Contrarian's Dream.

"Investors are getting a tremendous opportunity," Enrique Abeyta writes. After nearly two years of riding stocks higher, people have turned their back on this type of investment. But if we sift through the rubble, we could make major profits... Get the full story here: How to Buy Your Stake in Private Companies Like the Wall Street Elite.

Market Notes
INFLATION CAN'T KEEP THIS SNACK KING DOWN

Today’s company has the means to stay afloat in today’s volatile market…

With inflation expected to last well into 2023, investors are looking for companies with “pricing power”… If most companies raise prices to keep up with inflation, their customers would just walk. But companies with pricing power – and brands that consumers love – can raise prices without reducing demand for their products…

Kellogg (K) is a $25 billion breakfast-and-snack giant. Its brands include Froot Loops cereal and Nutri-Grain breakfast bars… as well as Pringles chips, Cheez-It puffs, and Eggo waffles. Over the past few months, Kellogg has raised its prices to counter inflation – but that hasn’t kept consumers from loading up their pantries with Kellogg products… In the most recent quarter, organic sales (excluding acquisitions and spinoffs) hit $3.7 billion. That’s up 4.2% year over year.

As you can see, despite the broader market’s struggles, K shares are up more than 10% over the past year and recently hit a new multiyear high. And as long as folks are sticking with their favorite Kellogg brands, this company’s pricing power will keep it strong…