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Going public with less scrutiny can be a wonderful thing for some companies but scrutiny tnd to benefit investors. The SEC may be difficult to deal with, but the long road to a traditional IPO contains a lot of checks and balances that tend to make those deals more transparent. Simon Erickson joins Dan Kline on 7investing Now to discuss where SPACs stand, why the number of companies going public this way has slowed, and when/if investors should buy shares in companies that go public this way.
July 21, 2021
Going public with less scrutiny can be a wonderful thing for some companies but scrutiny tend to benefit investors. The SEC may be difficult to deal with, but the long road to a traditional IPO contains a lot of checks and balances that tend to make those deals more transparent. Simon Erickson joins Dan Kline on 7investing Now to discuss where SPACs stand, why the number of companies going public this way has slowed, and when/if investors should buy shares in companies that go public this way.
Samantha Bailey 0:14
Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.
Dan Kline 0:24
Oh, Good afternoon 7investors and welcome to the Wednesday edition of 7Investing Now. My name of course, is Daniel Brooks Kline. I’m the host of the program. I am joining you from the Simon I’m gonna say sultry. That is how hot the air is here is basically shimmery to the touch. The sultry area, the humid area of Davenport, Florida at the beautiful Bahama Bay. I’ve been joined, of course by Simon Erickson and Dana Abramovitz. Both in Houston, Texas, how far apart Are you guys maybe a handful of miles apart here?
Simon Erickson 0:55
A couple miles but also sultry air here in Houston too with the humidity as well, Dan.
Dan Kline 1:01
My apologies for the excess water. But Simon I got something I haven’t had in two years, I have a cold. And I know in this day and age, like you go in any place and you cough mildly. And you basically have to pull out a scroll that details that you don’t have COVID but I have your your plain old fashioned like post nasal drip cold. That’s just like very minor. But it’s super throat irritating. So I’m going to go through many bottles of water during the show, Dana abramovitz, you are the healthiest person I know when is the last time you had a cold.
Dana Abramovitz 1:32
So I run a business, I’m not allowed to get sick.
Dan Kline 1:36
I remember those days. And we’re actually going to talk about that in the second half of the show. And the second half of the show, we’re going to turn to Twitter. And I asked people for the best advice, financial or business they’ve ever gotten from a friend or relative. And sometimes it’s not actual advice. In my case, it was sort of a work ethic I saw like I didn’t know that everybody’s dad didn’t leave the house at 630 in the morning, go to work, which was two miles away and come home at 530 at night and then on Saturday get to sleep in till seven because we didn’t open till eight o’clock. I didn’t know everybody’s grandfather didn’t have a work phone at their kitchen table. So if people didn’t answer the phone quickly enough on a weekend or an afternoon, if you randomly was taught, which almost never happened, where he would just pick up the phone. I didn’t know that wasn’t normal. So the work ethic I learned we’re going to talk about that later. But our big topic today this is one you’ve wanted to talk about this was one of as we go your questions and comments and Simon there’s some reasons why we brought this up. But uh, spax have been that’s been the word of the year, we were going to give a word x. And this is of course, the alternate way to go public. Not the weird little pets. Those are Spats. So we want to be careful there. But our topic here is have SPACs become less attractive. Before we get into that. Simon, why don’t you give us the 10,000 viewers? What is a SPAC? What are those letters even stand for? On? How is it different from an IPO?
Simon Erickson 3:00
Yeah, thanks for the clarification doing you know we are talking about SPACs, not specs, not Spock from Star Trek, you know, this is about these special purpose acquisition companies that are all the rage I’m coming public in the last couple of years, I SPAC is a is an alternative to the traditional IPO. Some fun facts that the number of SPAC IPOs in 2021, even though we’re only halfway through the year so far is already 50% higher than it was in 2020. And 2020 was even double what it was in 2019. And so this is really a huge developing trend of companies saying hey, I want to do the SPAC, I’m going to raise money this way, rather than the traditional IPO that we’ve gotten used to. And so I’d like to spend the first part maybe just chatting about what a SPAC is and how it’s different. And why companies might be interested in this.
Dan Kline 3:47
Yeah, let me jump in. And these are often called blank check company. So what does that mean? That means that let’s say Simon and I decide we want to invest in companies that have alternative outdoor experiences, so zip lines and, and manmade natural water slides, who knows? And we go, okay. And then we get someone who’s Well, no, we get a Tony Hawk team, and he puts in $100 million, and then we go out and raise half a billion dollars. And we say we have this ready to go public company. And we’re going to go after a private company. And we’re going to say, okay, you’re worth this much. Here’s that money. Here’s money for your balance sheet. Now you are public, and there’s very little scrutiny with this. Am I getting correct, Simon?
Simon Erickson 4:30
Yeah, that’s absolutely right, Dan. I like the analogy. And I love throwing Tony Hawk into the description of it as well, even better. I tend to think of it as a swimming pool. This is the analogy that I’ve come up with. It’s not perfect, but it’s the one that I’m going to roll with anyway, so forgive me say that you’ve got a great kiddie pool in your backyard, right? It serves your purposes you jumped in the kiddie pool. It’s great for us in Houston. Probably great for Davenport, Florida, right? It’s sweltering hot outside. Go jump in the swimming pool. You’re totally happy. But what do you get approached by someone else a SPAC financial sponsor say that says, hey, that’s a great swimming pool kiddie pool you’ve got, but I can build you a much, much larger swimming pool that you’d love even more, and you get more space to swim around in this swimming pool, but you just got to share a little bit of it with my investors here on the side. And we might even bring in some other investors as well, corporations or larger companies, and they’re gonna have a part of the pool too. But this is a much better swimming pool than you’ve got with your kiddie pool in the backyard right now. And that’s kind of how a stack operates in the private companies have got the kiddie pool that are upgrading, they get a higher valuation. They’re splitting the ownership of the business with financial sponsors who do the deal itself. Sometimes they bring in corporations or other companies that want to get in on this as well. And then as you said, they’ve got their own investors, the SPAC itself is holding funds that investors like you or I could get in as a public shell company as well. So much larger swimmer pool at the end of the day, it’s appealing for everybody, as long as everyone gets along.
Dan Kline 5:53
Yeah, so there’s actually an actual swimming pool about 20 yards behind me. So if you hear people screaming, there are lots of kids out playing at the swimming pool. And I actually saw a story today about a potential SPAC, that is the air b&b of swimming pools where if you have a swimming pool in your backyard, you can rent it out, of course, you’re also encouraged to get very expensive insurance through them, because there’s heavy liability. And you can make 10 to $20,000 a month. And that sounds ridiculous. But if you live someplace like Houston, Texas, or in my case, West, Palm Beach, Florida, and you’re the rare person who doesn’t have access to a pool, oh, boy, do you want to pool and paying 50 $75 for a couple of hours in a pool seems delightful. That’s the type of company that needs capital to grow. It’s a marketing play, you can you can prove the business model pretty quickly. But if it gets three $400 million, it can accelerate. So that’s the positive of what a spat can be. It can take a small company, or growing company and give it cash quickly allow it to grow. Before we get into how a SPAC could be very, very good for the company. I want to talk about some of the risks to investors. So when you do a traditional IPO, you do something called an s one. And s one is kind of like a financial Bible. Now I will point out that an s one is like an idealized document. It’s like your mortgage application, like on your mortgage application. You don’t point out like Yeah, I just paid off all those credit card bills yesterday, you just like you’re saying like I have no credit card bills, like you are very careful how you present it. That’s what an s one is. So they go out on what’s called a road show. And basically the CEO, the CFO, they appear in front of bankers, and they say, Hey, here’s why you should get your class to invest in us. It’s great. And it should be worth this and that when you have a SPAC Simon, you basically put out what like a two page document a postcard like there’s not a ton of information that comes in.
Simon Erickson 7:39
There’s still a regulated sec document and prospectus goes out for a SPAC as well. But it is a little different than the traditional IPO. Like you mentioned in Yeah, maybe to demonstrate this. Let’s go back in time, right, let’s hop in a time machine. Back to 2012. When Facebook did its traditional IPO writing, this is a really big deal. I mean, you guys remember what a big deal it was when Facebook went public, you know, and Mark Zuckerberg was saying, Hey, this is the largest valuation we’ve ever had for an American publicly listed company at an IPO $104 billion. Right. So this is really, really big deal. And Facebook hires underwriters to say hey, we’re going to sell shares to you for $38 a share. And we’re gonna see 480 million of these and raise $18 billion $18 billion, with a B of capital, they put on their balance sheet to start building up the business. And so JP Morgan, Morgan Stanley, Goldman Sachs all the underwriters said great, okay, Mark, that’s probably higher than we were probably gonna pay for this. But you know, we know you’re onto something here, we’re going to give you a $38 a share. And Zuckerberg also says, Hey, I’m also only going to give you guys a 1% underwriters fee, a percentage of the gross proceeds of the amount that’s raised in the IPO, typically five to 7%. Facebook says, we’re really onto something big, we’re gonna give you 1%, all the underwriters say, Fine. And the reason that I’m bringing all this up, Dan is because on the very first day of trading, we’ve almost gotten used to that IPO pop, right? Where you see Facebook trade in the first day goes up from $38 a share to like $75 a share $100 a share. It’s just like, that’s what we’ve gotten used to in IPOs. But that’s money that’s left on the table that is not collected by Facebook by selling it $38 a share to its underwriters, that is the market value and access the premium of having your shares public publicly traded that you’re missing out on a traditional IPO. And so I bring up the example of Facebook because on the very first day of trading, Facebook shares closed at $38 and I believe is 24 cents or 23 cents. So there was no IPO pop, Facebook brought all of it into the underwriters of what they paid them up front. There wasn’t a pop and they paid less of an underwriter speed. This is a more efficient way of raising capital. And other companies kind of use that as a model of saying how can we get away from these limitations of a traditional IPO? And that’s what’s really pushed this back movement which was, which was highly influenced by Sir Richard Branson, bringing Virgin Galactic public tourists back last year, a lot of others kind of use that as the new model of how they want to raise capital.
Dan Kline 10:13
It’s also worth pointing out and apologies if I have some internet issues I am, it is very, very hot that appears to be affecting how the waves travel here. But that being said, Facebook was widely considered a failure for two years that was written about as a disaster, because people put all this money in and they didn’t get these big returns. What happened with Facebook also was they had to revise their numbers about a week before they came out. And that was considered a little shady, what actually was the ethically correct thing to do? They also had a trading glitch at the beginning that was based was due to volume, it was unprecedented volume, that also created the impression that the scales were weighted that things were going on. So Facebook was wildly successful for Facebook. And that’s actually what you want an IPO to be as a shareholder. You want the company to get as much money as it can, and for its returns, and I promise we’ll work Dana abramovitz in later, she’s gonna be a big part of the show here. But you want the company to get as much money spend it well. And your returns might be three to five years down the road. Simon, how does this back do that differently?
Simon Erickson 11:16
Yeah, great. points. Dan, a great segue to so now we have a financial shell company, right? You have a financial sponsor that has a publicly traded, you can buy shares of us a ticker that’s publicly traded on exchanges, where you can buy into the SPAC, you can put your money into this piggy bank, that is SPAC investors that then that financial sponsor, he or she will go out and do a deal on your behalf. They’ll go out in this instance, with the company that you that we’ve started here, Dan, doing Tony Hawk stuff outside stuff, these facts sponsor would would come to you and say, hey, I’ve raised $200 million in the shell company, I would like to use that to buy 1020 49% of your existing shares out there. And we’re going to transfer it directly. We don’t care what the climates like in the in the IPO market, we don’t care what public investors or underwriters are going to do, this is going to be a set valuation terms that we’re going to give you it’s going to inject that directly. There are some considerations that I think we’re going to get to in a minute here, when we talk about the risks, but the benefit is, you actually are much more capital efficient in raising money from a SPAC because you kind of get to set the valuation, you set the terms and that money goes straight on your balance sheet as a private company.
Dan Kline 12:32
Yeah, so Dana owns a Fitness Studio. And if Dana decided she wanted to sell half her fitness, she doesn’t let arbitrary bankers decide what the price might be. She makes the best deal possible. So that’s great for the company. Here’s the potential negative a SPAC or an IPO, but it’s harder with an IPO can be used to transfer risk from venture capitalists, to individual investors. And what do I mean? Most not most, many SPACs that come out, are absolutely IPO global companies, and they’re taking a better slash easier route. I have seen quite a few specifically in my space of media, where a bunch of companies that could be profitable, but aren’t going to be huge growth engines, go Geez, how do we get $300 million? Well, if BuzzFeed and the athletic and I love the athletic, I don’t mean to diss any of these companies. If you roll up a bunch of these companies, well, there’ll be back office, or getting rid of some accountants isn’t going to make these companies high growth companies, they’re, you know, maybe they can co market and there’s some efficiencies, but you do see, and this is a shark tank term. You see a lot of good businesses use spax as a way to cash people out when there’s not a lot of upside for investors. So that’s where you need to be careful. And where you need to evaluate, you know, what are the long term opportunities, we see a ton of questions and comments coming in, we will take them towards the end of the segment. So Simon, the positive is you get the most money possible. The negative is you might not be buying an actual company. As an investor. How do you counteract this? I know I have a strategy for it. But how would you counter act buying into a company? That sounds good? Wow. It’s BuzzFeed meets the athletic being bought by the New York Times it’s like, maybe not so great. How do you go around that one?
Simon Erickson 14:13
Yeah. And then I should dispel a lot of kind of the adjectives that are used to describe SPACs out in the media right now, right, SPACs are not good or bad. They’re just more complex and different than what we’ve gotten used to. And so back to that swimming pool, you’ve got to know who you’re swimming with, right? Are the kids that are coming to the pool from the from the investors, are they terrorists, they’re throwing things at you, and now you don’t like being a part of this business with them. I mean, a big part of this is the terms of the deal itself. For one, there’s a lot of money chasing after companies right now. Interest rates are very low. A lot of financial dealmakers are looking to spax as a way that they can pad their pockets, and they’re giving to high evaluations for unsustainable companies. And so one thing you should really be watching if you’re looking into a SPAC is If you see that hockey stick, right, if you see the projections of the revenue and the EBIT da, a lot of times this isn’t just a year or two out, then they’re forecasting like 2027 2028. And saying, Hey, we might be very small today, you might be paying 200 times sales today. But look at the potential as this ramps up. That is very, very hard to do. It is very, very hard to grow exponentially for a five year period, all at the same time. So I think that you have to have kind of a boulder of salt, when you look at a lot of those projections that are that most of those companies are not going to reach those.
Dan Kline 15:37
Yeah, and the reality is, we we don’t invest in most publicly traded companies, we do our due diligence. So I don’t generally invest in IPOs, or SPACs, but here’s my exit. Not that I don’t like the companies. I’m going to wait until I’ve seen two quarters of reported earnings, gotten a feel for the CEO. But in my case, it’s I’m gonna let you jump in here and Dana, feel free to weigh in here. I think there are exceptions. So if a leader I truly love creates a SPAC with the idea that he’s gonna use it to buy copies that he’s gonna run or be a key advisor to, I might buy that on faith and the person so john Leger who left T Mobile as CEO, decided, or Patrick Doyle, who ran Domino’s for many years, created stacks in an area I felt comfortable investing in, I probably buy their SPAC day one because I trust their long term track record. I think the same could be said with some of the serial investors who are backing SPACs, you know, if you want to back Richard Branson, I don’t think that’s absolutely crazy. So in some cases I’ve been we’re kind of throwing our rules out, right?
Simon Erickson 16:38
Yes, the financial sponsor themselves really matters. And Dana, please jump in if you’d like me to not monopolize this conversation here.
Dana Abramovitz 16:46
I’m sitting here nodding my head.
Simon Erickson 16:51
Richard Branson, you know, and chamath Palihapitiya, which is the financial sponsor, he worked with a social capital. chamada is a very different type of investor than Bill Ackman is right. Bill Ackman has been an activist investor was trying to wring out synergies from very mature operating companies. shamov is investing in the space economy, you know, in climate change and stuff. That’s, that’s very less established today. So who is the person that’s doing the deal on your behalf and what kind of companies are they looking for, is very important. And there’s just one more thing that I maybe want to call a lot of investor attention to this very, I think it’s something we should really put a lot of scrutiny under is the dilution that is inherent in the deals that are being done for a SPAC. What I mean by dilution is when you’re buying in a SPAC, most of them are being sold at $10 a share, if you’re buying into the shell company, when it actually completes the merger. A lot of times, there are sweeteners for the deal, where there will be additional shares that are issued to the private company that agrees to come public, to the financial sponsor who does the deal. And to you as a SPAC investor, where you can get awarded more shares if the price hits a certain threshold. Right. And these are known as warrants, those are typically included when you’re buying into a stack, and is this back in the first place. But we’ve really got to pay attention to how diluted is the pie going to get and who’s getting the benefit of those warrants? Are we just loading up the financial sponsor that does the deal with a whole bunch of warrants? If it goes through? Are we giving it all back to the private company? Where they say, Okay, yeah, I’ll go, I’ll agree to go public with you. And if it hits this price, then we all make a ton of money and cash out? Or are you getting a fair and equitable part of that as well, as an investor in the back? I mean, all of these are considerations. You can’t just say, okay, everybody’s got the same terms. For everyone, these factors, they’re all very different. And it can make a huge impact on your returns.
Dan Kline 18:42
Yeah, this is an area we have to do your due diligence. And some of that is the financial terms. Some of that is the company. And I think you need to remember, these are structured. So your payoff as an investor is going to be long term, we see a bunch of questions. A lot of the questions in the queue are about specific companies. And I’ll leave it to Simon Dana, if they if they, if they know any of those companies, tell me which ones and I’m happy to talk about it. But I don’t want to introduce sort of discussions on which SPAC is better than the other. But I do see some questions I am going to take in a broader sense as we move through, but Simon, the SEC has actually cracked out on this a little bit. So spax, we were at a blistering pace. And it actually slowed down in April. And the reason for that is, the SEC is looking at whether bags are sometimes on multiple sides of the deal. This happens in IPOs, too, it’s called a Chinese wall, where part of the bank is taking it public and telling you it’s great. The other part is analyzing it and deciding if it’s great and they’re not supposed to interact. We worked in a company that had a Chinese wall for part of its business. It’s not an exact science, like I had coffee with someone on the other side of the Chinese wall at every visit. Now. Did we talk about things we shouldn’t know? But could we have? Absolutely and if we’ve stood to make millions, maybe we wouldn’t have like so. Just so what is the SEC doing and is this going to long term slow down this back market? Or is this just sort of a reasonable regulatory bump in the road?
Simon Erickson 20:04
I think it’s a regulatory bump in the road, that’s very necessary, it’s going to cut out a lot of the bad actors that don’t want to do their homework and actually have kind of a methodical process behind their forecasting. Right? So you can’t I mean, like, it’s less stringent on the forecasting of revenues, and EBITDA for spax than it is for, for operating companies where you can show, okay, here’s our cash flows, here’s, you know, here’s their operating history, it’s more, okay, if you’re a SPAC that’s going for the gold, but you don’t have a whole lot of history to raise money that way. And that’s why you see those hockey sticks. That’s why you see such frothy projections a lot of the time. And I think that what you say is very true that there needs to be a little bit more attention on on the actual business itself, rather than just the projections. And the other thing is related that I’ve done, I’ve been watching with the SEC guidelines for this. And the statement they made back in April, was the way that they’re classifying warrants. So again, back to Hey, we get more issue more more equity. I’ll start that over it more shares of this company issued if it hits a certain price that needs to be tied to the fundamental business itself, right. Like, you can’t say, Hey, we’re gonna issue more shares to Facebook, if Apple’s shares go up to $18, a share or whatever it is, it needs to be tied directly to the company that would be registered and listed on an American exchange and equity exchange. And a lot of times there were other factors characteristics of the SPAC of the financial sponsor of the the investment vehicle that were not tied to the operating company. And the SEC says, Hey, we’re going to be taking a much closer look at this. And a lot of those creative dealmakers kind of said, okay, maybe we should go back and do a little bit more homework, make sure that we’re compliant.
Dan Kline 21:38
More regulation is not necessarily a bad thing. And again, when you look at sort of SPAC projections, it’s a little bit like being a venture capitalist yourself. And you know, Simon, you’ve worked on business plans, I’ve worked on data, you’ve worked on business plans, when you read a business plan, the first three years are like your realistic growth, because that’s where the money you actually get is going to go. Your year four, and your five, you’re like, well, I’ve six franchises on Mars, like, like, I’ve done it a bunch of times. And that’s just how it works. Everyone knows those numbers aren’t real, you know, they’re their absolute best case scenario projections. That’s kind of how you have to look at some of this and be wary of, let’s call it industry opportunity, where someone just says, Wow, sports betting is gonna be huge, where sports betting invest in us that is, I hate to pick up that particular space cannabis, you know, this the space industry, just because Simon and I create Tony Hopkins is even more money and we create space Hawk, and we say we’re going to focus on our unique experiences in space, doesn’t mean we’re actually going to create a rocket ship or, or make a space scape, or whatever it’s going to be. Before we segue into some of your questions, we got a few we’re gonna take, I wanted to ask Dana, we promised on Twitter that we would answer this. So if you ask us questions on Twitter, and we promise we’ll answer them on the show we do that data, you’ve been asked a lot about sharecare. That’s a digital health company, I don’t know much about it. They just completed a SPAC. What are your thoughts here?
Dana Abramovitz 22:57
Yeah, well, assuming you a lot of the stuff that we’ve been talking about, um, you know, so I’ve been thinking a lot about digital health companies, I used to work in the digital health company. And, you know, doing research for a report that I’ll be putting out on through 7Investing on digital health companies. And, you know, it’s really hard, right? Because you, you have this, you know, a lot of times it’s just an app, right? And, you know, a lot of times companies are, you know, like, Is it a company? Or, you know, is it a business? Or is it just a product? Right, and, you know, with, with apps, and a lot of digital health, um, you know, people expect to have an app for free. Right. So you have to, you know, really look at the business models. So, um, you know, I think that, you know, you had mentioned, you know, like, you know, how do you take a company that’s kind of growing a little bit, but how do you get them to that accelerated growth that a company would normally do you have an IPO to, like, get that those funds? And so, you know, I think a lot of digital health companies it, you know, in order to get that amount of money for that growth, SPACs would be the way to go. And so, you know, we’re starting to see that a lot for digital health companies. And so, you know, like, with sharecare, you know, it kind of like, sneaks up, right? So, you know, like, you don’t get to see, you know, all the things that you would normally see if there was a roadshow when really, you got to understand what was going on. And so I think that’s kind of a little bit, you know, concerning for me, um, you know, chercheurs been around since 2012. Their leadership is is great, you know, very experienced, their CEO, was the founder of Web MD and you know, sold that to a very successful there. There are a lot of really great people on their team that You know, I know and I’ve worked with before, um, you know, it’s hard for me to know, their their business model and how they’re going to make money. And, you know, if those, you know, those hockey sticks are really going to, you know, come to fruition. You know, it’s, you know, as we’ve been talking, I’ve been, you know, I kind of came to finance through a VC route, you know, thinking about NBC, and these, these financial institutions kind of put you in that that chair of of a VC? And is this something that you want to invest in? not really knowing? As much so, you know, I, I’m a little bit weary of, of sharecare. You know, I think it’s, I think it’s a good company. But I don’t know, like for the long term. If that, you know, I think that we’re, we still need to wait a little bit longer to see that long term investment. That’s my take on it,
Dan Kline 26:07
it’s important to remember that a great product isn’t always a great investment. I think I’m feeding back through Dana there. And that’s a case where I mentioned the athletic before I checked the athletic 15 times a day. It’s a great sports magazine, featuring many of the best display sports writers around the country. But their best case scenario is subscriptions and advertising through their their free podcast, makes them profitable and sustainable. As an investor, that’s not a great business. We’re gonna take some of your questions and comments. There’s a lot of comments on specific companies. And I like to think we know a lot, but we haven’t worked up every SPAC that’s out there. So apologies. If I ignore some of those. I want to take the second comment from Max Lucas, and I’ll let Simon read that one because I know he wanted to answer it. Thanks.
Simon Erickson 26:54
Sure. Yeah. Okay. So I max says that I probably heard a two to three hours of coverage about p s th. That is Pershing Square tontitown holdings. That’s Bill Ackman SPAC that he’s raising money in and still can’t get all the dynamics of it straight. Any query here. Yes, exactly. That’s exactly the point is that nobody understands what’s going on with the details of those warrants, right. Pershing Square bill, I could have gotten so creative on the way that they’re they’ve structured this, that the parent company of the universal group music group that they were trying to acquire, or at least merge with through the SPAC was saying, Hey, wait a minute, we’ve got some some basically barriers in place that would prevent this from going through as an ordinary SPAC. And they only wanted to sell 10% of the company. And then Ackman kind of got creative on kind of how they’re organizing things. And they walked away from that deal. If you saw recently, what was it Dan was it a week ago, a couple of weeks ago, that Bill Ackman just said, Hey, you know, this is not in the interest of this pack holders, we’re going to dissolve the spat and not go through with this deal.
Dan Kline 27:49
So they knew that might happen. There was actually it’s actually happening for regulatory reasons. When they wrote that contract. Ackman wrote in and said, if this doesn’t change, I will do this with essentially a private entity. So this wasn’t a shock. But you do want to be beat to watch when you have a big name, like Bill Ackman. If he walks away from something that could have been a scenario where someone else stepped in, doesn’t make it a bad investment. But you still want to know why we’re going to take as many of your questions and comments here I think there’s a high interest topic. So if if we punt on the the second half of the show, that’s an evergreen topic. So I’m more more than happy to do that. But we’ve got I want to take Mike fees, comment first, and then we’ll go to silver traps for Dana. But feel free to get your questions and comments in the AV industry also as highly exaggerated projections. Yeah. I’m not gonna call this specific company into a, you know, into question, but we have a lot of companies that have a sizzle reel and a brochure and a promise of what they’re going to do. And then they take broad projections of the Eevee market, like sure, all cars will be Eevee by 2035, or whatever the numbers is. But that’s kind of like saying everybody eats I have a restaurant, like I’ll soon get 40% of the food market. So I mean, you want to weigh in here. This is this has to be one of the biggest problems with spax is that it’s so easy to hype them up.
Simon Erickson 29:09
I mean, I agree with that, Dan. I mean, there’s there’s so much money chasing after these trends right now, whether or not they’re sustainable is questionable. Evie is electric vehicles, the best thing you can hope for if you’re an unsustainable, hype fueled company is to get included in ETF, right where there’s dumb money that just funneling money to you, for this year, the share price of your shares, but you don’t have a sustainable business, goes back to what Dana said just a minute ago about how important it is to look at the history of the people that are running these companies, right? Are they just in it because they’re trying to grab a bunch of money and then cash out? Or are they actually experts in their field, who are saying, Hey, spax a more efficient way for me to raise capital and I’m going to use that on your behalf to grow my business. 10x I mean, I still believe I personally believe that there are some real real winners that are going public through spax right now. It’s just not Everybody’s going to be a winner you know we got to look for the diamonds out there in the in the field with diamonds in the rough, I guess I should say that are going to win from this because they’re out there and we can find them as investors but let’s not just assume that every spax gonna be a hockey stick is gonna come true.
Dan Kline 30:15
And you need to believe the path forward not the story. A lot of people get mad at me for saying I don’t like DraftKings and that that came public via SPAC. And I see a path where DraftKings could be successful I’m not saying I’m 100% right on this one. But I also see a lot of paths where the big casinos crush DraftKings because DraftKings have nothing I want in terms of a loyalty program. So if I’m betting on DraftKings, and then Cesar says, you can bet with me and you’ll get tier loyalty rewards, what are tier loyalty rewards? Those are the rewards that I get permanent for the year benefits like access to special lounges or $100 dining credits. Well, sending me a DraftKings t shirt or a meet and greet with you know, some low level bucks or whatever it is. That’s not the same as cutting the line at every show in Vegas or getting rooms or whatever it is. So you can like a company you can like the business in its in. You can also be very wary. I’m going to take one next for Dana.
Simon Erickson 31:10
I’m going to comment on that real quick. I mean, DraftKings is a perfect example. Right? This is a financial sponsor that was previously CEO of MGM. Right. And this was the same team that raised money for them. They always have Eagle in the name of it, I think it was flying Eagle at the time, or diamond Eagle maybe now got Soaring Eagle, which is bringing gingko bioworks public through his fac can go by works. Of course, DNA synthesis is a really hot topic. I’m sure Dana and I could chat about this on a future show. But printing from the DNA level for micro organisms to do specific tests, kind of like programming life like we programmed computers to do. Really, really cool company, really, really cool leadership team out there. Ginko $15 billion valuation, right. So we’ve got the ultimate knock it out of the park, if you can, incentive, the SPAC sponsor is highly incentivized, if they double their share price within 90 to 180 days after going public. Some of that makes me raise an eyebrow, even with a great leadership team. If this makes sense. For me, as an investor who’s getting in a little late to the party.
Dan Kline 32:12
It’s like any other investment, you have to look at the overall situation there IPOs that come out that you look and go Wait a minute, is this just so all the insiders can cash out? And sometimes that’s that’s the case, like, if I’m investing in an IPO, I want to make sure the CEO sell a couple million dollars. So you’re set for life that that I’m totally cool with. That’s, that’s, that’s sensible strategy. But if you’re selling 98% of your holdings, that’s a real real problem. Now look deeper, because sometimes there’s reasons that has to happen. So make sure you understand that could be a tax transaction, it buys it back a week later, like you, you want to fully understand what’s happening. We appreciate the so many people saying hello, there’s so many great comments. I wanted to get to silver traps question for Dana. And I also wanted to thank or miss Kaplan for for saying hello, and being excited to see Dana on the program. Well, we’re excited to see you as well. I hope this is a friend of yours, Dana. Or maybe it’s just a friend of the family here in San Fran investing. So see, if you want to pull up silver traps question for data, thoughts on talkspace, mental health company that came through this background? I love the idea of this company data? I don’t know the business of it.
Dana Abramovitz 33:20
Yeah. So um, they’re actually really well rated. You know, so if you look at a lot of them mental health companies, and, you know, they’re like, 20,000 of them, you know, it’s it’s nice to have, you know, in a highly stigma stigmatized area to be able to, like, have kind of discreet conversations over text and, you know, a video conferencing with a therapist, and so talkspace Emily, that’s what they do is they help connect you to a licensed therapist. So that you can, you know, they have everything ranging from, you know, couples therapy, to psychiatry, so, you know, where you actually need medication for your treatments. And, you know, again, though, you know, like a digital health company that, you know, can’t quite grow enough, you know, or would raise enough money through an IPO. So, you know, is able to go public through the SPAC merger. Um, you know, I do think this is a good company, because it is being utilized. Right, like, you know, people really like it. And, and we’ve talked before, you know, if you’re a subscriber of 7Investing, and you read our recommendations, a lot of times we’re talking about, you know, the Net Promoter scores of companies and, you know, companies that you’re really well liked, by their users doing really well. And so, you know, like, I think what talkspace is, is they are in that same situation.
Dan Kline 35:01
So that is a perfect segue because usually between segments, we’ll talk a little bit about subscribing to 7Investing all the benefits of that, I would tell you that, that I’m so excited about my pick next month, which in a weird way, isn’t that well rated with consumers, but is actually beloved in another way. And I actually explained that in my pick, which Simon really helped me add depth and detail to but that’s not what I want to talk about. Now, because we did something different this month, we write what we call a perspectives article every month, that is Simon poses a question to us. And all seven of us, Simon included, give our answer. And our answers could be very, very different. So it might be what’s your path to identifying a 10 bagger? This month? Simon? What was the question? And what was the unique twist you gave us that we’ve never done before? that’s caused all sorts of fun for us to figure out the process here?
Simon Erickson 35:52
Oh, yeah. Thanks very much for the chance to talk about this. And something I’m really excited about, you know, every month, like you said, we pose a question to the team. And it highlights how diverse Our team is, right? How we are all different investors, we think about the market differently, we look for different things. And it kind of frame perspectives from seven lead advisors. And this other question this month, is what I was pretty excited about, which is, who do you think is the most likely publicly traded acquisition target in the market? Who is most likely to go out there and get acquired by someone else? And other than that, there were no more there were no other limitations, right? Could be a small cap company company, could I get cap company I mean, who is in the sweet spot that you think is going to be acquired by a much larger company? Well, cash is cheap. And everybody’s talking about SPAC IPOs, and people coming in public and making acquisitions. And so what we’ve done is we’ve picked seven companies that we believe are great acquisition targets, I’m going to publish one per day, for the next week, starting tomorrow, Dan to our Twitter to @7Investing on our Twitter feed. And we’re also going to publish all of them tomorrow to 7Investing.com, they’ll appear as articles on our 7Investing homepage. But I know that we always love to talk about this, right? Like, who is an acquisition target out there? Why would they be acquired? Who would acquire them? I mean, all of this is kind of fun stuff, at least for me as an investor to think about. And we’re really kind of kind of excited to show you who we’ve come up with Dina shaking her head, but I actually really like the company you came up with to dinner.
Dan Kline 37:21
And there’s also a second part of this for members only. Simon, I don’t know how much you want to give away publicly. Yeah, so so we also wrote a second piece that says okay, if that deal happens if the company we say would be acquired, who does that most effect that’s on our scorecard. So we actually give this is an interesting bit of speculation for members obviously a lot has to happen. But we’re telling you if blank buys blegh this is going to impact this company we recommended even which way that was a really actually fun exercise to do because you had to go look through the scorecard and no, it was hard for me to date and we booked it was a challenge. But that’s just the kind of thing now for members. Is that a core product? No, of course not our pics, our videos are our company updates, but is it a really awesome fun second piece to read. And I will be honest, like I could read these before they come out sometimes I edit our stuff and in this case, I’m really glad that I was actually out and I haven’t read any of these because I really looking forward to reading it along with the members. I know mine is something I truly believe will happen. But I also spent five years believing Amazon was gonna buy Radio Shack I I probably have on the record of saying that was gonna happen on 200 separate podcasts. I was spectacularly wrong. I think it still makes sense even though Radio Shack doesn’t exist anymore. So I’m excited about this and if you want to get in on both parts of the action, and get in our new picks which come out August 1 August 1, if you told me it was 10 days from now I believe you if you told me it was six months from now, but apparently it is about 10 days from now. That is what our new picks come out and we have an amazing array of picks. And I mentioned I have a pic that’s a company I don’t actually use. I’ve been there but it is not a company that I am the core customer for and I absolutely love it and I will say and this won’t be reflected in my write up. But Matt Cochran really helped me along with Simon develop my thinking on this and months of just chatting about it over dinners and what we liked got me to the point of Wait a minute, it doesn’t matter that I don’t want to shop there. They don’t want me to shop there either. Like like you know that’s you know and not in like a country club in Georgia kind of said it’s like in a you know in a in a in a I am not their target demographic. Sorry, George. I just drove through you and I’m teasing a little bit. Asking for a meal for Dan. We’re weird to have rest stops with a smoke shop. I’ve never been driving and thought you know what I want a brisket. But you know that said I get it. You love pecans. You love peaches. I was making an old school 80s Masters joke there about who could go and who cannot go apologies to anyone that might have fed but that being said, our picture Come out. And for you to get those picks, you have to be a member, how do you get become a member, the easiest way to do it is go to 7investing.com/subscribe there, you’ll be asked to sign up. And you can pay us either $49 a month, that is American dollars, we can translate for whatever country you’re in. But it boils down to American dollars or, and this is where the deal is. This is where I don’t want to sound like the guy that sells you Flex Seal. But the real deal here is if you pay $399 a year, we don’t have to worry about it, you make the one payment, and you get 10s of 1000s. I don’t know a lot of value, I would get in trouble if we speculate as to how much value it actually is. But it’s a lot of value. It’s a lot of fun. We do our members only call where you can ask us any questions. And usually that’s about stocks. But if you want to ask Steve about his rib recipe, he’ll probably answer Yeah, we try like you can see just watching this show. We have fun with each other. And I think we have fun with our members you see as we interact with people who have, you know, are active contributors to this show, that we just really like being here. And I think that’s really valuable, a valuable part of our service. Because I buy most of the 7Investing recommendations. I think a lot of us do that and limited almost by Well, I’m not gonna buy $2 slices of things. So I have to somewhat pick and choose and as I’ve said many a time I picked and choose, I generally buy Macs and Dana’s suggestions, because they’re the ones that are least like what I buy, we’re gonna get back to your comments. Simon, you I know you want to take one from Max Lucas, did I asked that one? Or did I forget and not get to it?
Simon Erickson 41:29
I think we did. Do I want to highlight silver traps comment to about loving 7Investing I love when we make comments like this one. Sandy, we put it Yeah, I love 7Investing, you’re doing a fantastic job. I don’t have the cash to buy all seven. But I tried to buy a couple lifetime memories of Thank you. Thank you so much for the support. Like you said, you know, we have a diversity of picks, I would go so far as to say that I would bet that everyone on this program, there’s at least one company that we’re recommending next month that you haven’t heard of before. If you’ve heard of all seven of them, I’m very impressed because we’ve got some, some hidden gems coming out in the next round of recommendations on August 1.
Dan Kline 42:06
I don’t think I’ve ever heard of all seven of them and be here since October. Silver Trump also points out that that company to be acquired, and I’m mentioning this because I know I’m going to share this on Twitter. Simon shared a chain on Twitter where he pointed out that fastly hired a CFO who specializes in being acquired that is the depth of analysis you get from this team like that is not something I would have known in a million years. On the other hand, if a retailer brought in like a turnaround expert as their chief marketing officer, or someone whose past 10 stops has resulted in you know, bankruptcy or packaging the chain to be sold elsewhere. That’s the type of thing by following specific industries. We give you that insight, I want to take the mortgage comment from Max Lucas just sort of close this out unless anyone jumps in with anything great. Max says I know in mortgage max works in the mortgage space, we are seeing high net worth people getting loans, because they want hard assets and debt because of inflation fears. is the same happening to drive up private business valuations. I’ll speak to this a little bit Simon, it’s absolutely driving up real estate valuations. And I would assume it’s driving up predictable businesses. So if you wanted to buy say a McDonald’s franchise that very predictably on $3 million a year produces $400,000 in cash flow, you might be paying higher and higher premiums for that. We’ve seen that at very heavy cash flow times where like people wanting to buy predictable, set it and forget it internet businesses. And you know, I’m sitting in a condo, and I’ve been pretty forthcoming. We bought this condo for slightly above asking in the 140s. It is a beautiful two bedroom resort condo, that you can’t find one listed for less than 199. That’s not people like me, that’s speculative money that just wants a hard income producing asset. And if you’re gonna produce 2030 grand a year in income, the difference of 149 and 199 just isn’t that much when you have the safety of the hard backed asset that’s going up in value. So I’m in your thoughts here as I as I coffin Have a drink of water here.
Simon Erickson 44:12
Yeah, sure thing I got to give you a spell here, Dan. Max, you are the expert in this space. Since you are the one that works it day in and day out. I just refer to what my colleague Steve Symington has been talking about with ibuying. Right, like institutions that are buying up houses because all the data is out there. And the the open doors and the red fins and Zillow is of the world are going out there and scoop it up the deals, right. It’s really hard if you’re an individual to go out and find a good mortgage anymore because it just gets scooped up by somebody else who says boom, investment property. Let’s take that one out there. And so is this a trend? Is this a is this part of the cycle that you know, it just kind of we all say Oh, it’s crazy. Right now my neighbor just sold his house for 20% above his asking price, but all things are gonna settle down, or is this kind of the new normal that things get scooped up much more efficiently in real estate. It’s kind of be interesting to see how this plays out the next two or three years, I
Dan Kline 45:02
think we’ve had multiple periods over the last 20 years where sort of an excess in Wall Street profit has led to people wanting to hedge those into other more stable investments. Look, if you buy I have a friend who has a minute man printing, if you want a minute man printing, they could forecast to like the $100 how much revenue you’re gonna make if you do your job correctly. So there are a lot of people and look, do things falter? Yeah, there’s a lot of subway way franchisees that are not super happy right now. But for the most part, there’s a reason people buy say a Dunkin Donuts over an Arby’s and why a Dunkin Donuts, but I know they don’t use donuts anymore, but I’ll never be able to say that correctly. Why Dunkin? You know, might be a very premium franchise that can say to you, you have to spend a million dollars on your first one and you must build or buy a second one within a year. Because they can do that. Whereas, you know, Arby’s basically can say we will give you a franchise. And if you have any sales will be really I’m teasing Simon because we’ve ever
Simon Erickson 45:56
Arby’s again, Dan, this is-
Dan Kline 45:58
there’s like 15 of them within 30 miles up here because I am near Disney World, where basically just every chain repeats over and over. This is like the 80s we still have chains like shawnees that don’t exist anywhere else are Ponderosa, which I think you’d have to go back to 1984 to visit a Ponderosa someplace other than here, I’m getting a smile out of Jannah. That makes me very happy. We appreciate so many of you playing along. This is not the show we planned. We planned the second part to talk your Twitter comments on financial advice. But it’s the summer when we got a hot news topic that seems to be working, we’re probably going to go with it because we’re gonna have our slow news days where those Twitter based topics are going to be very beneficial for us. But we’re nearing the end. Sam Bailey, we’re probably nearing the end of my Internet’s feasibility, my computer seems really, really hot to the touch. Let’s hit our finisher here. Which type of investment aside from stocks? Are you most comfortable with? 28 20.8% take cryptocurrency 10 point 11% say spec 62.9, say real estate 6.3 say precious metals. I put this question out there because a spax not a type of investment. It’s a method for going public. So I don’t generally buy newly public companies no matter how they come public. And there’s a couple of other ways they can come public that we haven’t talked about. I look at the underlying company and I wait six months, why do I do that? You get a feel for the CEO, you got some financials, you start to see if the story plays up the way they tell. So I’m never going to discount, but investing in any company because of how it went public, it might affect my timing, real estate to be as the safest. Because if you buy a piece of real estate, so let’s say this property I bought, which is now worth $50,000 more than I paid for it two months ago, which is absolutely absurd. But if it goes back to 2008 levels, where it’s only worth 80 grand, you know what didn’t change for me, the fact that I get to go on vacation, I like it like my income might change, because maybe the rental rates flowed out of the overall economic structure, it’s out, but maybe they won’t, because Disney word world may not track to the real estate market. So real estate at a long threshold, to me is the best of the investments here. So I’m in your thoughts that’ll update away. And
Simon Erickson 48:11
it’s certainly the one that I would probably say you’re most comfortable with, with the way the question is phrased is you have the most insight into predictability of your future cash flows. Make sense? I will say that, you know, there are a lot of maybe just to close this out, Dan, there’s a lot of questions about specific SPACs that are showing up in the questions here. And really hard for us to blow through those on the live stream. But what Steve Symington and I have been doing is incorporating those into our podcast, we chatted twice last week about SPACs, you go to 7Investing.com just type in SPAC in the search bar in the middle, and really quickly get our insights on and we pick four companies that were presented to us on Twitter that people said, Hey, I really want you to dig into this one. Can you give me some more insight into these SPACs? We’ve done two of those so far. I expect we’re going to do more because we only got through a fraction of what people wanted us to chat about. Oh, indeed. I had something else you wanted to add to that as well. We’re gonna get into more SPACs in the future too. So if you have ones that you want us to take a closer look at, please interact with us @7investing on Twitter, email@example.com we’d love to take a look at some of these. Steven, I kind of continue our nerdery of getting into the depth of the details of how these SPACs are coming public.
Dan Kline 49:30
Yeah, we love your questions working up an individual accompany in live time is obviously difficult if it’s not one we’re already familiar with. But we do for members, you know, we take your questions. If it’s someone in the team knows it, we’ll talk about it. I threw out an interesting tweet earlier this week about Who do you want me to be talking about individual stocks really with outside investors on the show, but whose investing perspective would you like on 7investing Now, and I’ll tell you I’ve got two really interesting ones book for next week. Some just different voices that are out there that are people I’m super excited to talk to. If you are a voice that you think should be on the program, let me know I am easy to find on the internet. My Twitter is right by my name. But you can also hit us up @7Investing. And that brings us to let me tell you how you get in touch with us. If you have an email for us, that’s firstname.lastname@example.org. It’s the number seven. But let me give you a secret. The word seven works too. We have both of those. That is not true. If you want to interact with us in a more social way, or want to put something on our radar, we take things we see on Twitter, and you know we’re going to talk about them on this show. If that happens, you can do that @7investing on Twitter. Everybody’s disappearing. Internet’s not going well. I am going to close the program here. I am Dan Kline. For Dana Abramovitz, for Simon Erikson, for the wonderful Samantha Bailey who did get her passport. That conversation might have happened off air but we may have alluded to it on air but it takes a really long time to get your passport. So if you need one, apply now. Sam, thank you for directing the show. We will see you on Friday back in West Palm Beach.
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