Southpaw 34: Major League Capitalism
Athletes are driving a speculative bubble on Wall Street—and it might be about to pop.
Dear Readers,
While neither of us has anything even resembling an economics or business degree, we hear that’s not necessary to have an opinion about the markets these days. So this week, we’re diving into the Wild World of Wall Street—with a patented Southpaw twist. Hopefully you at least learn something new about the mergers and acquisitions process. (We certainly did.)
As always, we love to hear feedback! Enjoy.
-Ian and Calder
Athletes are endorsing SPACs in droves. What does that mean for the rest of us?
Move over, Wheaties. Athletes have found a new favorite business to endorse: special purpose acquisition companies, or SPACs.
Over the past year, a growing number of athletes have thrown their support behind these up-and-coming Wall Street entities, driving a massive surge of interest in a previously obscure financial tool which, until recently, most savvy investors had written off as a sneaky way for financiers to dupe amateur investors out of their money. In the past year, athletes including Shaquille O’Neal, Stephen Curry, Serena Williams, Alex Rodriguez, Odell Beckham Jr., Colin Kaepernick, Naomi Osaka, Tony Hawk, Eli Manning, and Patrick Mahomes have signed on as “sponsors” to existing SPACs, and some high-profile athletes have even started their own. (Sportico has compiled a full list of sports-related SPACs here.) Celebrity athletes’ involvement with SPACs has grown so intense that the Securities and Exchange Commission issued an alert in March warning inventors not to invest in a SPAC simply because it enjoys the backing of a celebrity or star athlete.
Our friends over at the Wall Street Journal can supply you with details about the market dynamics and investment risks of the SPAC market, but here at Southpaw, we’d like to take a deeper dive into the political implications of this new market craze. Is SPAC-mania just the latest fad to capture the attention of entrepreneurial athletes, or does it signal a deeper shift in the role of athletes in our broader political economy? Can we separate endorsements from advocacy, or have endorsements become inherently political?
Before we get into political weeds, let’s first explain what a SPAC is. Also known as “blank check companies,” SPACs are public shell companies that exist for the sole purpose of merging with other companies—typically smaller start-ups—to take those companies public. In Wall-Street-ese, this process is called a “reverse merger” or a “reverse IPO,” since it is the exact inverse of the conventional initial public offering model: rather than a private company raising money through an IPO, a SPAC raises funds from “sponsors”—mostly institutional investors—though its own IPO, which it then uses to purchase a smaller “target” company and take it public through a merger. As one internet sage put it, “An IPO is basically a company looking for money, while a SPAC is money looking for a company.”
If this all sounds a little shady, well, it is. In theory, a reverse merger benefits both investors and the companies that they purchase. From the standpoint of a small target company, a reverse merger offers a relatively quick and easy way to raise money without the logistical headache and long delays associated with traditional IPOs. At the same time, SPACs provide investors with flexibility and a degree of security, since the funds raised during an SPAC’s IPO are held in escrow until a deal is complete—meaning that if a deal falls through, investors can still recoup their funds. Although investors don’t have a say in the substance of a deal, they are given the right to approve or nix a deal before it becomes official. If they nix it, they are no worse for the wear. If they approve it, investors can either swap their existing shares in the shell company for shares of the merged company or simply cash out on their investment, plus whatever interest accrued while the money was being held in a trust.
In practice, though, most SPACs end up being poor investments. Because the reverse merger process places a premium on speed—SPACs typically have to complete a deal within 24 months or else return the funds to investors—blank check companies frequently overvalue their target companies, leading to lackluster returns for sponsors down the road. (According to a 2020 report by the Congressional Research Service, between 2015 and 2020, SPAC shares delivered an average after-market loss of 18.8%, whereas traditional IPOs showed an average positive return of 37.2%.) Moreover, the single-blind nature of the reverse merger process also creates myriad opportunities for fraud and abuse, and SPACS are subject to significantly less regulatory oversight than traditional IPOs. Just recently, in March of 2021, the Securities and Exchange Commission opened an inquiry into the SPAC dealing of four major American banks to ensure that those banks have sufficient regulatory frameworks in place to prevent fraud and other misdeeds. They have yet to conclude that inquiry.
To build confidence among investors and target companies, SPACs put together star-studded teams of Wall Street veterans, business celebrities, and, increasingly, professional athletes. Although these celebrity backers are also investors in the SPAC, they are frequently given extremely favorable terms that limit their liability and inflate their pay-off. According to Jeffries, high-profile SPAC sponsors frequently receive up to 20 percent of the common equity of a SPAC in exchange for an investment of approximately 3 percent to 4 percent of the IPO proceeds, meaning that a celebrity sponsor could earn $60 million of common stock in an SPEC valued at $250 million for an investment of only $7 million. For a celebrity sponsor, then, SPACs are actually a pretty good deal: low risk, high pay-off. For a non-expert investor—the type of person who might, say, be convinced to invest in a company because Shaq sits on its board—it’s probably a bad idea. (According to Bank of America, retail investors account for 40 percent of SPAC trading on its platforms, compared to only 21 percent of trading for S&P stocks.)
Nevertheless, the market for SPACs has taken off in the past year, riding a wave of celebrity endorsements and the slowdown in traditional IPOs caused by the coronavirus pandemic. In 2020, 256 SPACs went public, raising a total of $83 billion—more than four times the record of $15.5 billion in 2019. In the first three months of 2021, 295 SPACs went public, smashing the previous record by raising $93 billion.
The dramatic uptick in SPAC trading caught the attention of the SEC, which has begun cracking down on regulatory loopholes. Now under mounting pressure from both investors and the SEC, the SPAC bubble is showing signs of bursting. As of the end of April, CNBC’s SPAC Post Deal Index, which tracks the largest SPACs that have announced a target or those that have already completed a SPAC merger within the last two years, had wiped out all of the gains it made in 2021 and continued to fall by more than 20 percent.
The future of the SPAC market will depend in large part on the SEC’s next steps, but the long story short is this: a group of athletes-turned-entrepreneurs helped drive the SPAC market into a boom-and-bust cycle that has the potential to do real harm to average investors.
In any other year, this might not warrant much scrutiny, but following a year of intense public debate over the political and social responsibilities of professional athletes, it does. Left-leaning athletes have spent the past four years demonstrating that they are authoritative voices on issues that fall outside the narrow confines of the sporting world. Between their principled opposition to Trump’s authoritarianism and their outspoken support for the Black Lives Matter movement, progressive athletes succeeded in earning the trust of a large segment of the population. For the first time, a slim majority of American adults support athletes’ ability to publicly endorse a political party or candidate, and an even narrower margin approve of athletes who kneel during the National Anthem to protest police brutality against Black Americans.
Choosing instead to use that platform to peddle risky investments damages that hard-earned trust. Especially in post-Great Recession America, entering into an endorsement deal with an under-regulated shell company is not an apolitical action. The allure of lucrative endorsement deals have been an impediment to athletes’ political engagement for as long as they’ve been around. (Just think of Michael Jordan’s famous justification for his refusal to endorse Democratic candidate Harvey Gantt to become the first Black senator from North Carolina: “Republicans buy sneakers, too.”) But the political dynamics of SPACs are even more treacherous. Because SPACs depend primarily on the buy-in of exorbitantly wealthy institutional investors, a deal with a SPAC is even more likely than a shoe deal to dilute an athlete’s progressive convictions—or even skew his political involvement in favor of economic elites. Even in the case of left-leaning athletes like Colin Kaepernick, whose SPAC is focused on business with a “social justice focus,” relying on the munificence of Wall Street to underwrite the cost of political progress is a doomed political project (and, apparently, a bad business model).
You might object: What’s the difference between an athlete endorsing a blank check company and endorsing a shoe brand or a cereal, as celebrity athletes have done for decades? Well, here’s the thing: a SPAC isn’t a product. Strictly speaking, it’s not even a service. It is, in effect, a speculative gamble on the promise of future earnings—and because of the single-blind nature of the investment, it’s a particularly risky gamble for an average investor to make. An athlete endorsing a SPAC is the equivalent of A-Rod encouraging you to buy a box of Wheaties, except inside the box, there may in fact be no Wheaties, or there might just be a bill for twice as much as you paid for the Wheaties in the first place. And you don’t know before buying it!
Of course, there’s no bright red line delineating what types of products or services it’s appropriate for athletes to endorse. But common sense would seem to dictate that it should fall somewhere this side of highly-speculative, largely unregulated financial investments.
In a more general sense, SPAC-mania serves as a timely corrective in the broader progressive discourse about the economic rights of athletes. Progressive should oppose arbitrary restrictions that artificially limit athletes’ participation as full and autonomous actors in the free market—like the NCAA’s ban on corporate endorsements for college athletes. This is just a straightforward matter of fairness: if an average person can sell her name, image, and likeness to a corporation in exchange for money, why not a college basketball player? Eliminating these restrictions will free college athletes from what is essentially indentured servitude to their educational institutions. But if college athletes do succeed in winning greater control of their personal brands, they, like the rest of us, will be entering an economic system that’s rife with corporate malfeasance, bad-faith actors, and systemic inequalities. The lucky ones will become grifters, maybe complete with their own SPAC endorsement deal. The unlucky ones will be the grift-ees, making poor investment decisions either out of desperation or because someone on Reddit told them to.
This is progress, we guess—but towards what?
RODNEY’S ROUNDUP
Do you want to read about. . .
. . . how the international anti-racism movement is leading some American athletes to speak out in support of Palestine? “Israel causes American sports stars like Kyrie Irving to break their silence. Here's why it's taken years,” by Dave Zirin for MSNBC (May 14, 2021).
. . . another take on the International Olympic Committee’s decision to enforce its ban on political protest? “The IOC Is Now Daring Olympic Athletes to Protest,” by Dave Zirin in The Nation (May 13, 2021).
. . . the latest on NBA executive and Senate-hopeful Alex Lasry? “Wall Street roots. NBA owner’s son. Wisconsin’s next Democratic senator?” by Candace Bucker in The Washington Post (May 10, 2021).
. . . British baseball’s struggles with sexism? “Baseball in Britain Confronts Issues With Sexism,” by David Walstein in The New York Times (May 13, 2021).