Christmas decorations used to be a sign that winter had begun. It now means that stock market forecasts are imminent.
Two-third of the IPO proceeds this year have been spacs (special purpose acquisition companies). More money has been raised in spac IPOs this year than ever before.
Next year may be the year that sanity returns to the spac market. The frauds might be exposed while the genuine backdoor listings could surge. Investors in spacs should be guided by Leo Koretz, an American swindler who died in 1923. He seems to have risen from the dead. Koretz’s sins may be reappearing as spacs.
Leo Koretz began as a moderately successful lawyer in Chicago but was soon bored by it, forcing him to quit for greener pastures.
In 1911, Koretz began issuing stocks in a company styled Bayano River Syndicate. He claimed to have procured 1 million acres of timberland in Panama. Oil was soon found on the estate.
With the oil, the company promised an annual dividend of 60%. Oil prices were skyrocketing at the time. Ford Motors had just delivered a killer app — the automobile. This product is still popular.
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In those days, cars were pathbreakers like Tesla’s electric vehicles. There was a thirst for oil to fuel cars.
Koretz had a masterstroke to generate interest in Bayono’s stocks. Instead of promoting it, he actively discouraged people from investing in it. He claimed that limited stocks were available but he could accommodate deserving investors.
This “playing hard to get” tactic increased the scarcity value. There was a stampede for Bayono’s shares. He raised US$30 million (US$400 million or $547.3 million in today’s money) from all walks of life. Rich Chicagoans even got their minor employees to put their life savings in it.
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Koretz craved success. His wife and children lived in a 15-room mansion. Wealth was not his only passion. Koretz had a string of girlfriends. Some of them were feted with houses of their own. He was unfaithful even to his mistresses.
It turned out that the Panama plantation was fictitious. The money that was raised funded the dividends. When the investors visited Panama, the 5,000 employees were not found. No one had heard of the plantation.
Bayano’s stock collapsed, ruining thousands of ordinary people. Koretz went into hiding but was eventually caught. Koretz was identified by a tailor who noticed his name in the overcoat. He was jailed but took his own life.
Koretz’s scheme has a modern-day parallel. Some spacs have been raised as blank cheques for non-existent companies. Exhibit A is the Digital World Acquisition Group (DWAC) spac. It found the Trump Media & Technology Group (Trump Media) as an acquisition target in October.
Trump Media is the former American President’s non-existent venture. He wants to challenge Facebook and Twitter’s monopoly. Trump Media does not even have a business plan.
This did not prevent DWAC from soaring 1,800 % in two days after its merger with Trump Media. The market waits for Trump Media. It has since missed its self-imposed deadline of presenting a trial version of the alternative to Twitter.
Instead of chasing non-existent companies, investors need to focus on spac mergers with substance. The golden goose of spac trades is headquartered in Singapore.
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On Dec 2, Grab’s reverse merger with Altimeter Growth Corp was completed. The stock has since lost half its value. Early investors in Grab seem to be heading for the door. They are locking the steep capital gains.
Grab is a steal at US$25 billion market capitalisation (US$7 per share). It has US$5 billion of net cash. This price places its enterprise value at less than one times its FY2023 gross merchandise value. This is 20% below Alibaba Group Holding’s valuation.
Like Alibaba, Grab can emerge as the “super app” of Southeast Asia, becoming a one-stop shop in this region of 650 million people. The Green app is the first port of call for ride-hailing, food delivery and payments. Other services like insurance and education are in the offing.
Grab’s frenetic revenue growth is hard to miss. Its net revenue is on track to rise from US$46 million in FY2018 to US$1.5 billion in FY2021. This is a CAGR of 214%.
Chasing fantasies in Panama in the 1920s and Trumpland today can end in misery. There is a spac bonanza hiding in plain sight in Singapore. Next year could see it take off.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in these columns
Photo: Former US president Donald Trump leaving the White House in January. His media venture might be a fantasy like the Koretz affair / Bloomberg
