A Conversation with Bill Ackman
https://corpgov.law.harvard.edu/2021/02/16/a-conversation-with-bill-ackman/
BILL ACKMAN (BA): To see the problem with SPACs, you just need to look at Churchill Capital Corp. III, which did the largest SPAC deal of all time through a merger with MultiPlan, a Hellman & Friedman-controlled company. That deal closed a little over a month ago, and the stock of MultiPlan is now trading at six and a quarter, which means that the investors have lost about 37% of their money and the sponsor has made several hundred million dollars. I think that when those kind of dichotomies happen, there’s going to be a lot more scrutiny on the structure, and you have the example of the well-publicized Nikola SPAC, where there have been some allegations of fraud.
With Pershing Square Tontine Holdings, we said look, we like the idea of a SPAC but we hate the structure; we don’t think the terms make sense for investors. We approached this not from the perspective of getting additional assets we could charge for or promote, or getting founder’s stock. We approached this with the thought that this is a really interesting time in history to buy a large minority stake in a private company, and there are more large-cap private companies than ever before. Why? Because of the growth of private equity. Because of the very significant number of venture-backed businesses that stayed private for a very long time because of the ability to raise capital from funds like SoftBank. Because of the family-controlled businesses that have, just by compounding since the financial crisis, grown enormously in value. Then you have the proliferation of companies that want to spin off divisions, where a SPAC could be a very interesting reverse Morris trust execution. We thought, there’s a huge universe of potential targets, and if we could create the most investor-friendly SPAC then we could raise as much money as we want, and if we could create the most merger-friendly SPAC, we only need to find one of these companies and hopefully we can buy a great business at an attractive price where everyone wins. That was the thinking.
In a typical SPAC, you’ve got a sponsor that puts up a few million dollars, a forward purchaser that puts up $50 or $100 million and investors who buy stock in the IPO. Once they find a target, the sponsor ties it up. Because the capital can redeem, they have to run around and find so-called PIPE capital, so they tie up some PIPE capital, announce the transaction and hope that the public investors stay. That’s a very awkward process to try to do a deal. Our thinking was, how do we design a structure for the right investors who want to own the company, as opposed to arbitrageurs? How do we incentivize them to make it a really attractive deal? And how do we eliminate the bad incentives?
So, our structure works as follows. We maintain the same ratio of warrants to shares: for every share you buy, you get a third of a warrant. Therefore, for nine shares, you get three warrants. Unlike other SPACs, we don’t give you all three warrants upfront; we give you one warrant, or 1/9 of a warrant for each share. It’s only after we’ve announced the deal and the opportunity to redeem your capital has expired that you get the additional two warrants. If you redeem, you forfeit the warrants. For the investors who stay, there is a fixed pool of warrants that gets divided among those people. So we reward loyalty and punish, if you will, redemption or disloyalty.
What’s interesting about that structure is that every share always trades with 2/9 of a warrant. This means that once we announce a transaction, we expect the stock to trade up significantly because we’re going to do a good deal, of course. The stock will trade up even more because the stock will trade with 2/9 of a warrant per share. Our warrants today are trading at $7.27, meaning 2/9 of a warrant therefore are worth about $1.60 or $1.65 prior to the announcement of a deal. When we announce a deal, the warrants go live and they’ll be worth $8-$10. 2/9 of a warrant will be worth a couple bucks. With a stock with an IPO price of $20 plus warrants that are worth $2, if the stock doesn’t trade up at all in the deal, the package would be worth more than $20. As long as the stock trades for more than $20, no one will redeem from our structure. And because through redemption they only get $20, in order to get the value of the warrants they have to either stay in the deal or they have to sell to someone who exits. And I can actually pull up a PowerPoint or a presentation and walk you through this. We’ve designed a structure in which the $4 billion we’ve raised will actually be there, meaning we don’t need PIPE capital. Because there’s no separation between the sponsor and the forward purchaser—those two entities are the Pershing Square funds of which I personally am the largest shareholder—we fixed the alignment problem. And by committing a minimum $1 billion in capital by having this tontine warrant structure, we now have a $5 billion equity check that we can deploy. We also negotiated the underwriting fees from five and a half points to 1.9%. And we pay the underwriting fees with the purchase of a warrant [from the company]. The only economic difference between us and public shareholders is that we purchased a warrant at the time of the IPO, which we paid fair market value for. And then we took the proceeds, $68 million dollars, we paid off two-thirds of the underwriting cost. So our structure is $5 billion of equity, there’s only $30 million of frictional costs, and as a result it’s the most investor-friendly structure in the market.
This construct was very appealing to investors—we had $12 billion of demand by the second day of the roadshow. So we were able to pick and choose our investors, which include the most important sovereign wealth funds, community pension plans, state plans, 50 billionaire family offices, from Saudi Arabia, U.S., Switzerland and all over the world. We think companies will care about who their shareholders are, and this is sort of a unique opportunity to pick up a collection of the best investors in the world as your shareholder base.
So, a long-winded answer. It’s got a lot of features. The simple story is that we have the largest SPAC, the most efficient structure, the most investor-aligned entity and the ability to deploy $5 billion of capital to take a minority stake in a company and take it public.
