SPACs: Risk Arbitrage with Special Purpose Acquisition Companies Long and IPOed Companies Short

SPAC or special purpose acquisition company are essentially blank check shell companies such as Chamath Palihapitiya's Social Capital Hedosophia Holdings II & III, or IPOB and IPOC respectively and Bill Ackman's Pershing Square Tontine Holdings, or PSTH.UT intended to acquire a high growth private company for a subsequent IPO listing, reminiscent of a reverse merger. IPOB is seeking to merge with a small-cap tech company whereas IPOC and PSTH.UT are both targeting large-cap tech companies; though Ackman's PSTH.UT is contemplating a potential partial acquisition if determined more profitable. This is reflected by IPOB's, IPOC's, and PSTH.UT's market capitalization of $560 million, $1.1 Billion, and $4 Billion, respectively. Bill Ackman stated recently in an interview with David Rubenstein that Pershing Square Tontine Holdings will restrict its search to mature innovative companies, private equity portfolio companies lacking vital liquidity, and family-owned businesses bereft of essential capital, exclusively those of which that confer attractive balance sheet, impeccable financial health, low debt, sustainable cash flows, and increasing operating margin. Conversely, Chamath Palihapitiya is famous for his high growth, and not yet profitable tech company IPOs, such as that of Virgin Galactic which was 'launched' through a SPAC in October 2019 and persists to operate at a deficit. Thus, both IPOB and IPOC will presumably result in the formation of overvalued and initially unprofitable technologies company with inflated P/E in excess of 30. 

   
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  Comparable to conventional mergers and acquisitions, shareholders in the beneficiary of these deals which is likely to be the SPACs as purported by their proprietors, Pershing Square, and Social Capital will liquidate their position in the merged, or acquired company as was observed in the Virgin Galactic, or SPCE IPO shortly proceeding its listing on the NYSE where from October 18 to November 29, it declined by $3.13 to $7.25 per share, an approximately 30% loss. This is a common occurrence among many mergers and acquisitions according to Guy Wyser-Pratte who in his 1975 book, Risk Arbitrage suggested that many short-term shareholders in the acquired or benefiting company seeking to secure their profit, sell their shares in the new or merged company immediately upon listing or once the merger is finalized. A rally often encompasses the company benefiting from the deal preceding its closure until the benefit or consequent discount relative to the price it is presumed to be acquired for, or likely to gain is arbitraged away. Thus, one might initiate an initial long position in any of the preceding SPAC IPO of a multiple of 100 shares, or more if optimistic as to their future growth potential, write OTM covered call options, sell the options continually until the profit negates or exceeds the cost of the shares (obviously utilizing technical analysis or charting tools to ensure precise timing as rallies frequently subside within weeks or months of the listing, then cyclically recur before the merger), write ATM puts for new stock of merged company during first weeks of listing when short-term shareholders are liquidating(again utilizing technical analysis or chartings tools, etc.), and finally await the short term appreciation of the remaining stock held in the merged company, assuming Palihipitiya and Ackman create value for shareholders in these SPAC IPOs as achieved in their previous ventures, (e.g. Virgin Galactic, or SPCE which appreciated by an excess of 200% from its IPO in October to February 19).