CNBC’s Jim Cramer on Thursday implored viewers to steer clear of special purpose acquisition companies right now, suggesting there’s too much risk for retail investors because of the structure of the transactions.
“The SPAC deals keep coming because they’re a great way for institutional money managers to get a guaranteed return, but everybody else in the process gets the short end of the stick,” the “Mad Money” host said. “Sooner or later, privately held companies will figure this out and stop agreeing to participate, but until then I recommend you give this group a wide berth or no berth at all.”
The pace of SPAC deals accelerated this fall, following a months-long slowdown beginning in March after the Securities and Exchange Commission issued new accounting guidance involving the blank-check firms.
“We’re now seeing roughly 20 SPAC fundraises per week. That’s insane. Again, that’s because while buying a SPAC stock after a deal gets announced is a terrible bet, getting in on a SPAC IPO actually makes sense financially,” Cramer said.
“As long as you come in early, when the SPAC is still just a pile of money, you’ve got a no-lose scenario because you can always decide to cash out at $10 whenever a deal gets announced,” Cramer said, describing a process known as a redemption.
Additionally, Cramer said money managers who participate in the initial SPAC IPO typically get lucrative equity warrants alongside the actual shares of stock.
“The problem is, most home gamers can’t take full advantage of these SPAC IPOs, and the companies that decide to merge with SPACs are getting a raw deal, too,” Cramer said.
Instead, retail investors largely have to buy SPAC shares as they trade on the open market, Cramer said. However, Cramer said that generally once the blank-check firms announce their merger target, the stocks have struggled. That’s why he’s advising retail investors to just stay away.
“When you zoom out, it’s remarkable how badly some of these post-deal SPAC stocks have done,” Cramer said, noting that the CNBC Post SPAC Index, which consists of 193 SPACs, is down sharply for the year.
“If the market reacts poorly to the news of a merger, the SPAC’s early shareholders can just back out,” Cramer said. “But the investors who come in later still experience the carnage, and there’s a lot of it.”
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