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SPAC'd out: Everything you need to know about the next hyped-up investment fad – CBC.ca

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From house prices to tech stocks to digital art, the COVID-19 pandemic has had a counterintuitive impact on the prices of a variety of assets, driving many to record highs at a time when the economy is still reeling.

Now, some experts are warning about a niche type of investment vehicle that’s veering into bubble territory and in danger of bursting.

The investment in question is known as a SPAC, a special purpose acquisition company. While SPACs have been around for more than a decade, 2020 has proven to be a record year for them as investors explore more and more arcane fields in search of stratospheric returns.

Conventionally, a company would start out by slowly building out its operations to the point where it became profitable or showed enough growth to attract investor attention. The company may then choose to go public in an initial public offering (IPO), selling its shares to raise money to grow and expand further.

SPACs turn that process on its head, because they are essentially just a pool of money that already trades on the stock market, looking to buy up promising companies. SPACs are also known as blank cheque companies — they don’t do anything besides buy up companies that are either functioning businesses, or sometimes little more than an idea for one.

Celebs get in on the action

And business is booming. Almost 500 SPACs have gone public since the start of 2020, and they’re flush with more than $150 billion US in investor cash, data compiled by Bloomberg suggests.

The trend has gone mainstream, with celebrities from outside the world of finance jumping in. Former NFL quarterback Colin Kaepernick heads up one with the stated goal of investing in companies “that currently have or have the potential to generate a positive social impact.” Hip-hop mogul Jay-Z‘s SPAC is focused on cannabis. Retired baseball player Alex Rodriguez is the frontman for one worth $500 million US. The former slugger says his braggadocious goal is to build “the Yankees of SPACs.”

Some members of the investment community are now saying the SPAC hype has gotten way ahead of itself.

“I think it’s no different from any other asset bubbles right now,” said Genevieve Roch-Decter, CEO of Toronto-based investment firm Grit Capital, in an interview. “It’s all the phenomenon of cheap money being printed, and people at home with nothing to do playing the stock market.”

The more ephemeral and weird the SPAC’s focus, the more appealing. Anything to do with technology or “ridiculous ideas” like flying cars are de rigueur, she said, but “if you can value the company like boring old real estate, those don’t do well.”

Big upside for founders

Regardless of whether a SPAC ends up finding a good business to buy, its appeal is obvious for the people building it and then trying to curry favour from stock market investors. Many SPACs offer up to 20 per cent of the shares to sponsors and founders when they are set up as a way to generate attention and hype from mainstream investors.

A recent JP Morgan analysis suggests SPAC founders saw returns of almost 1,000 per cent on average, regardless of how the SPAC itself performs once it makes an acquisition. As Roch-Decter puts it, “they don’t have that much downside and tons of upside.”

The same can’t be said of retail investors buying in. Of roughly 100 SPACs tracked up to the middle of 2020, the analysis found less than a third of them saw their share price go up.

Those founder shares usually have far more lenient lockup periods, too. When companies go public via an IPO, there are normally stipulations that require insiders to hold their shares for several years, which conveys confidence in the business but also prevents them from flooding the market by cashing out, and pushing down the price for everyone else.

Most SPACs don’t have the same stringent requirements.

And that’s just wrong, according to Anthony Scilipoti, president and CEO of Toronto-based Veritas Investment Research.

“I buy the stock thinking the insiders are locked up for months and now I find out they can sell?”

Anthony Scilipoti, president and CEO of Toronto-based Veritas Investment Research, says the hype around SPACs suggests to him the bull market may be nearing its end. (Veritas)

While good businesses will always attract investment, Scilipoti says he thinks a lot of the SPACs coming to market today “will end in tears.”

He says SPACs have been around for a while, but have become overhyped during the pandemic, partly because there is a lot of stimulus money floating around the markets, looking for a place to go. “People have short memories,” he said.

The SPAC boom is primarily a U.S. phenomenon, but there are a handful of ex-SPACs on the Toronto Stock Exchange’s main index. One of them, Apollo Healthcare, raised $1 billion to much fanfare in 2015, and ended up deploying that money into three health-related acquisitions. The early returns were not good: from an initial stock price of $10 a share in 2017, Apollo was trading as low as 31 cents a share at one point last year.

The shares have since jumped to about $5 because of the frenzy over hand sanitizer, one of the products that Apollo makes, but Scilipoti says he thinks the shares “will probably fall 80 per cent again once the pandemic is over.”

A bubble ready to burst?

Roch-Decter says she worries about what happens to the stock frenzy once markets turn, which they seem to be doing. A Bloomberg index of SPACs has fallen by 10 per cent since the start of March, far more than the broader market.

Genevieve Roch-Decter, CEO of Toronto-based investment firm Grit Capital, says many retail investors have never seen a bear market, and she worries what happens once the SPAC hype dies down. (Genevieve Roch-Decter)

She says the same generation that made a fortune by holding firm with GameStop may be in for a rude awakening if the SPAC appetite weakens. While some high-profile, successful businesses got their start via SPACs, “a lot of these businesses don’t have revenue and the valuations are ridiculous,” she said. 

“Some will be successful like Draft Kings,” she said, citing the fantasy sports and gambling company that merged with a SPAC last year and has seen its value soar by more than 600 per cent since the pandemic began. “But there’s going to be a bunch of them that are just going to die.

“As long as everyone knows what game they’re playing, I’m fine with it, but I don’t think a lot of retail understands this.”

Scilipoti says the SPAC frenzy is being driven by the same forces pumping up many asset bubbles — and he’s seen first-hand just how intense the market frenzy has become.

“My 62-year-old physiotherapist is asking me what’s happening in bitcoin and what’s happening in GameStop, or if I’ve heard of some of these other … startup penny stocks,” he said.

“These are not things that happen at the bottom, [so] I know we are near the end.”

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Canadian Business During the Pandemic

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In 2019 the world was hit by the covid 19 pandemic and ever since then people have been suffering in different ways. Usually, economies and businesses have changed the way they work and do business. Most of which are going towards online and automation.

The people most effected by this are the laymen that used to work hard labors to make money for there families. But other then them it has been hard for most business to make such switch. Those of whom got on the online/ e commerce band wagon quickly were out of trouble and into the safe zone but not everyone is mace for the high-speed online world and are thus suffering.

More than 200,000 Canadian businesses could close permanently during the COVID-19 crisis, throwing millions of people out of work as the resurgence of the virus worsens across much of the country, according to new research. You can only imagine how many families these businesses were feeding, not to mention the impact the economy and the GDP is going to bear.

The Canadian Federation of Independent Business said one in six, or about 181,000, Canadian small business owners are now seriously contemplating shutting down. The latest figures, based on a survey of its members done between Jan. 12 and 16, come on top of 58,000 businesses that became inactive in 2020.

An estimate by the CFIB last summer said one in seven or 158,000 businesses were at risk of going under as a result of the pandemic. Based on the organization’s updated forecast, more than 2.4 million people could be out of work. A staggering 20 per cent of private sector jobs.

Simon Gaudreault, CFIB’s senior director of national research, said it was an alarming increase in the number of businesses that are considering closing.

We are not headed in the right direction, and each week that passes without improvement on the business front pushes more owners to make that final decision,”

He said in a statement.

The more businesses that disappear, the more jobs we will lose, and the harder it will be for the economy to recover.

In total, one in five businesses are at risk of permanent closure by the end of the pandemic, the organization said.

The new sad research shows that this year has been horrible for the Canadian businesses.

 

The beginning of 2021 feels more like the fifth quarter of 2020 than a new year,” said Laura Jones, executive vice-president of the CFIB, in a statement.

She called on governments to help small businesses “replace subsidies with sales” by introducing safe pathways to reopen to businesses.

There’s a lot at stake now from jobs, to tax revenue to support for local soccer teams,”

Jones said.

Let’s make 2021 the year we help small business survive and then get back to thriving.”

The whole world has suffered a lot from the pandemic and the Canadian economy has been no stranger to it. We can only pray that the world gets rid of this pandemic quickly and everything become as it used to be. Although I think it is about time, we start setting new norms.

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Shopify shares edge up after falling on executive departures

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By Chavi Mehta

(Reuters) -Shopify Inc shares edged higher on Thursday, recovering partially from the previous day’s fall, with analysts saying the news of planned senior executive departures may have limited impact due to the company’s deep talent pool.

Chief Executive Officer Tobi Lutke said in a blog post on Wednesday the company’s chief talent officer, chief legal officer and chief technology officer will all leave their roles.

“We remain confident it (Shopify) can continue to execute at a high level, despite the departures,” Tom Forte, analyst at D.A. Davidson & Co said, pointing to the company’s “deep bench of talented executives.”

Shopify, which provides infrastructure for online stores, has seen its valuation soar in the past year as many businesses went virtual during the COVID-19 lockdowns, turning it into Canada‘s most valuable company.

Shopify declined to comment further on Lutke’s statement suggesting current company leaders would step in to fill the three roles. After chief product officer Craig Miller left in September, Lutke took on the role in addition to CEO.

The Ottawa-based company is Canada‘s biggest homegrown tech success story, founded in 2006 and supporting over 1 million businesses globally, according to the company.

Jonathan Kees, analyst at Summit Insights Group, called the timing of the departures “a little alarming” but said the specific roles make it less concerning, given that the executives leaving are “more back-office roles.”

Lutke said each one of them had their individual reasons to leave, without giving details.

“I am willing to give Tobi’s explanation the benefit of the doubt,” Kees added.

Toronto-listed shares of Shopify were up 3.5% at C$1526.41 on Thursday, giving it a market value of C$188 billion ($150 billion). It ended down 5.1% on Wednesday.

“While we would refer to the departure of three high-level executives as ‘significant,’ we would not refer to it as a ‘brain drain,'” Forte added.

($1 = 1.2541 Canadian dollars)

(Reporting by Subrat Patnaik in Bengaluru; additional reporting by Moira Warburton in Vancouver; Editing by Sherry Jacob-Phillips and Dan Grebler)

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Almost half of Shopify’s top execs to depart company: CEO

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By Moira Warburton

(Reuters) – Three of e-commerce platform Shopify’s seven top executives will be leaving the company in the coming months, chief executive officer and founder of Canada‘s most valuable company Tobi Lutke said in a blog post on Wednesday.

The company’s chief talent officer, chief legal officer and chief technology officer will all transition out of their roles, Lutke said, adding that they have been “spectacular and deserve to take a bow.”

“Each one of them has their individual reasons but what was unanimous with all three was that this was the best for them and the best for Shopify,” he said.

The trio follow the departure of Craig Miller, chief product officer, in September. Lutke took on the role in addition to CEO.

Shopify, which provides infrastructure for online stores, has seen its valuation soar in the last year as many businesses went virtual during COVID-19 lockdowns. It has a market cap valuation of C$182.7 billion ($146 billion), above Canada‘s top lender Royal Bank of Canada.

It is Canada‘s biggest homegrown tech success story, founded in 2006 and supporting over 1 million businesses globally, according to the company.

“We have a phenomenally strong bench of leaders who will now step up into larger roles,” Lutke said, but did not name replacements.

Shopify said in February revenue growth would slow this year as vaccine rollouts encourage people to return to stores and warned it does not expect 2020’s near doubling of gross merchandise volume, an industry metric to measure transaction volumes, to repeat this year.

Chief talent officer, Brittany Forsyth, was the 22nd employee hired at Shopify and has been with the company for 11 years. She said on Twitter that post-Shopify she would be focusing on Backbone Angels, an all-female collective of angel investors she co-founded in March.

Shopify shares fell 5.1% while the benchmark Canadian share index ended marginally down.

($1 = 1.2515 Canadian dollars)

 

(Reporting by Moira Warburton in Toronto; Editing by Aurora Ellis)

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