How can a pre-merger SPAC trade over $20?

Sig said:
@blueraincap you're right, them trading at a premium before they even have an acquisition target isn't supported by anything fundamental that I can see.
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No, well yes it makes little sense to deviate from $10 by much before announcing a target, but what I am saying is it is difficult to believe so many trade above 20 after target announcement and pre-deSPAC as the $X-$10 resembles magnitude of IPO-pops (ie the deal-making prowess of the sponsor to spin gold out of thin air).

So many smart guys selling SPACs, hedge fund happily subscribing the IPOs as arbitrage trades, target companies owned by PEs using SPACs to go public, pipe investors happily invest at de-SPAC stage, so who is paying for all these happy guys? either the economics created by the rainmaking sponsors, some financial engineering, or the secondary investors.
 
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blueraincap said:
No, well yes it makes little sense to deviate from $10 by much before announcing a target, but what I am saying is it is difficult to believe so many trade above 20 after target announcement and pre-deSPAC as the $X-$10 resembles magnitude of IPO-pops (ie the deal-making prowess of the sponsor to spin gold out of thin air).

So many smart guys selling SPACs, hedge fund happily subscribing the IPOs as arbitrage trades, target companies owned by PEs using SPACs to go public, pipe investors happily invest at de-SPAC stage, so who is paying for all these happy guys? either the economics created by the rainmaking sponsors, some financial engineering, or the secondary investors.
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It seems to be a bubble based supply and demand issue, which would point toward the secondary investors paying in. For whatever reason a PE firm can't get as much for a company by doing a traditional IPO as by selling it to a SPAC even though the resulting company is identical, irrationality which indicates to me a bubble at least in the SPAC space.
 
Try to buy when they first come out. Most I have seen price around $10.
They're like a guaranteed long call. If they don't merge/acquire you get your $10 back.
Your cost is the time value of the $10. What's that worth? A few cents? But it does tie your trading funds up.

Edit: Some come with warrants and that has been the better play IMO.
 
blueraincap said:
A SPAC is basically a bag of cash, backed by about $9-9.5 per share, waiting to do a deal to invest into a private firm.
Now a deal is announced, the target is a strong name in a sexy industry, the SPAC holders like the name and want to stay involved and happy to pay the deal maker by getting 20% diluted.

However good the target is, SPAC is simply a cash investor + a public shell, nothing more, so if the investment deal (merger term) is more or less reasonably priced, the remaining SPAC holders will lose a bit through dilution as each share is only backed by $7-8 post-founder-share.
If the deal is slightly under-priced, the SPAC holder should break even at about $10.
If the deal is very under-priced, the SPAC holder can win by paying all the dilution bringing cash below $10.

Still I don't get how can a SPAC trade at $20-30. The deal has to be substantially under-priced by a factor of 3-4 (leaving 3x+ cash on the table) to make it pay.
Say, ABCD went public raising $1bn, has announced merging with a sexy AI firm FireAI, ABCD share trading at $25, post-merger cash is around $7/share. FireAI is valued at 10bn in the deal post-money, so original ABCD holders will own about 7%, sponsor 2%, original FireAI guys about 90%. For the ABCD shareholders buying at $25 to be above-water, the post-merger firm has to be valued above $30bn (under-priced by more 3x).

Fair enough, IPOs are often under-priced and IPOs often see big price jumps. But a target owners are private equity firms and I doubt they have as much incentive to underprice than a distributed IPO, and even then wouldn't underprice by a substantial factor.

What am I missing?
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More people are buying than selling.
 
  1. Start a SPAC
  2. $10 per share
  3. Make publicity
  4. Wait till the stock goes over $20
  5. Sell all the stocks you have

After that:
  1. Start a SPAC
  2. $10 per share
  3. Make publicity
  4. Wait till the stock goes over $20
  5. Sell all the stocks you have

After that:
  1. Start a SPAC
  2. $10 per share
  3. Make publicity
  4. Wait till the stock goes over $20
  5. Sell all the stocks you have

Repeat the same cycle over and over again, till you find no idiots anymore and retire.
 
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virtusa said:
  1. Start a PAC
  2. $10 per share
  3. Make publicity
  4. Wait till the stock goes over $20
  5. Sell all the stocks you have
After that:
  1. Start a PAC
  2. $10 per share
  3. Make publicity
  4. Wait till the stock goes over $20
  5. Sell all the stocks you have

After that:
  1. Start a PAC
  2. $10 per share
  3. Make publicity
  4. Wait till the stock goes over $20
  5. Sell all the stocks you have

Continue till you find no idiots anymore and retire.
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Yeah, that's what I was saying earlier.
 
Went short 2000 shares of CCIV today.
The name went way up last week on expectation it is "merging" with Lucid, a sexy name.
I have seen SPACs going way up on deal announcement, which makes sense, but a SPAC trading at $40 before any announcement is like an IPO is trading at 4x before an IPO-price is even announced, implying traders are saying I will pay 4x wherever you price it. Understanding crazy sentiment can do damage, hedge half of the position and doing it at a reasonable size.
 
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