The Lex Newsletter: a Spac clapback

Dear reader,

The giddy days of 2021 when US companies could swerve traditional listings in favour of special purpose acquisition companies (Spacs) are long gone. Last year, Spac listings dropped 86 per cent compared with the previous year, according to S&P data. This year may be even lower.

Spacs are shell entities that give companies a backdoor into markets. The quality of the companies that opt for this route has been questionable. I remember reading a Lunch with the FT with the “king of Spacs” Chamath Palihapitiya in which he offered a stream of not very good rebuttals to such accusations. Time has not been kind to his legacy.

This week, Lex looked at how Spacs have gone from public listing vehicles to life support.

Like several other electric vehicle companies, UK EV start-up Arrival listed via a Spac in 2021. Its outlandish forecasts included $14bn of revenue by 2024. As of this year, those forecasts remain miles away and Arrival is running out of cash. Enter a new Spac. Arrival is merging with Kensington Capital Acquisition Corp V, paying a huge premium in order to add $300mn to its balance sheet. It is a desperate move that is unlikely to trigger a Spac revival.

With all US listings, Spac or otherwise, in the doldrums, China offers a rare bright spot. Ten companies debuted on Shanghai and Shenzhen exchanges this week to a chorus of first-day price pops. That is partly because China has overhauled its own rules and removed daily trading limits in the immediate aftermath of initial public offerings. But it is also a reflection of increased demand for mainland stocks from overseas buyers. Lex expects to see a steady stream of Chinese deals this year.

America’s most famous investor, Warren Buffett, was circumspect of the US Spac boom, rightly suggesting back in 2021 that the incentive structure encouraged bad bets. He might not have managed to quell demand at the time but his influence on markets remains impressive. News this week that Berkshire Hathaway would increase investments in Japanese stocks has managed to lift the entire market.

Since investing in five of Japan’s trading houses three years ago, Buffett has increased his exposure twice. All five pay high dividends. Still, Lex questions their merits. These are large, slow-growing businesses that have all been affected by supply chain problems and are forecast to report a fall in net profit.

Reading the tea leaves 

Not every EV maker is suffering Arrival’s trouble. Swedish truckmaker Volvo AB is already selling more electric trucks than rivals Daimler Truck or Traton. The first quarter looks positive according to preliminary results, with operating margins for trucks and construction equipment at record highs.

This does not chime with predictions of economic slowdown, during which companies might be expected to hold off new orders. But dismal forecasts are easing, aided by lower gas prices. Central bankers have slowed down interest rate rises. In March, the US Federal Reserve and Bank of England raised rates by a quarter point rather than a half point. Is some of this related to concerns about the banking sector? Lex wonders whether central banks are right to relent in their quest to quell inflationary pressures just in case more banks follow the collapse of Silicon Valley Bank.

Still, even if rate rises have come to a halt, the era of ultra-cheap money is over. That means unconventional investments — bitcoin or litigation finance, for example — should lose their shine. Shares in London-listed litigation financier Burford Capital are at a four-year high following a positive ruling for plaintiffs against the renationalisation of Argentine energy group YPF in 2012. But one good result does not change the fact that financing legal cases is a volatile area of investment.

Case files

A legal showdown is under way in the US over reproductive health. Campaigners are supported by more than 400 senior pharma and biotech executives at companies, including Pfizer and Merck, who have spoken out against a preliminary injunction against abortion pill mifepristone — a drug that received approval more than two decades ago. Lex says drug groups are right to worry that the ruling could trigger a precedent for more challenges to the authority of the US Food and Drug Administration. Such an outcome would raise drug costs and lead companies to cut back on development.

Accounting for errors 

Finally, a Lex note on the risks posed to accountancy by artificial intelligence spurred a passionate outpouring of reader comments. EY, whose grand plan to break apart audit and consultancy activities has just crumbled, can rest easy for now.

Among the many good points made was the fact that companies tend to be so careful with data that they may not provide the sort of quantity needed to fire up effective AI. There was also some healthy debate on the merit of describing ChatGPT etc as AI. That’s a topic I’m really interested in. More to come.

Other stuff I liked this week 

Here’s a great BBC podcast on an incredibly strange suburban life coaching company called Lighthouse that required followers to hand over thousands of pounds and sit on long daily video calls. The horror! The rise of life coaching is a fascinating subject. If you’ve encountered anything of note in this area, do drop me an email.

This fantastically gossipy Vanity Fair account of Rupert Murdoch’s life over the past few years has everything: succession drama, yachts, Trump, a supermodel and someone who thinks US pundit Tucker Carlson is a messenger from God. I can’t recommend it highly enough.

Enjoy your weekend,

Elaine Moore 
Deputy head of Lex