Is this the worst deal of the SPAC era?

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The poor performance of companies that went public through mergers with special-purpose takeover companies encouraged the US Securities and Exchange Commission to strengthen investor protections and disclosure requirements.

SPACs were touted as a shortcut to a stock market listing and a way for retail investors to gain access to promising start-ups. But hype and haste have often derailed due diligence and financial controls. The promise gave way to losses and, in some cases, lawsuits. An index of 25 companies that went public by combining with a SPAC has plummeted more than 75% from its peak in February last year.

When financial historians demand a poster boy for the SPAC boom and bust — echoing Pets.com in the dot-com era — they’ll have plenty of options, but they may end up naming View Inc.

The disastrous $1.6 billion merger of the “smart window” maker with a SPAC backed by Cantor Fitzgerald illustrates why renovations are long overdue. Already reeling from an accounting scandal that erupted months after the SPAC deal was closed in March 2021, View last week warned that it was in danger of running out of cash. The stock extended its decline to 93%, making it the second-worst-performing SPAC deal in the past two and a half years. (1) The cast of institutions involved with the company and its ill-fated blank check transaction – Cantor, Goldman Sachs Group Inc., Softbank Group Corp., Credit Suisse Group AG and the now insolvent Greensill Capital – looks like a game of bubble bingo technological.

To recap, View manufactures glass panels with an electrically charged coating that automatically tints when the sun shines, eliminating the need for blinds.

The Silicon Valley-based company has racked up about $2 billion in losses since its inception more than a decade ago and has negative gross margins — a fancy way of saying its smart windows cost more to build than they sell.

However, SPAC delivered $815 million in gross revenues and in November 2020 confidently predicted that View would require “no additional equity capital” before achieving positive free cash flow. However, View said last week that its ability to continue operating was in “substantial doubt” because its $200 million in cash won’t last another 12 months. Oops.

And since View has not reported earnings since May 2021, it risks having its shares delisted from Nasdaq later this month. The gap stems from View’s August disclosure of accounting irregularities related to anticipated repair costs. Inaccurate collateral rollups forced its chief financial officer to resign in November. The most realistic liability calculation far exceeded the company’s modest annual sales. “Discovering an issue with the functioning of our finance and accounting organization is painful,” View CEO Rao Mulpuri wrote in a letter to employees in November, adding that he took “full control” of the issues.

Warranty review has been completed and no other material errors have been identified. However, despite assurances of “substantial progress,” the company has yet to publish updated accounts for 2019 and 2020, nor accounts for the past four quarters. Oops again. The preview did not respond to requests for comment.

After investing more than $200 million in the SPAC transaction, Singapore’s sovereign wealth fund, GIC, must be furious. Retail investors who have hoarded shares are also licking their wounds. Not surprisingly, some have filed a class-action suit.

Others have only themselves to blame. SoftBank Vision Fund pumped $1.1 billion into the company in 2018 — one of a long list of reckless investments in capital-intensive real estate companies (you may remember WeWork Inc. and Katerra Inc., which also imploded ). SoftBank remains View’s largest shareholder, with a 30.5% stake.

Interestingly enough, a large chunk of SPAC’s proceeds were clearly earmarked to pay off a high-interest $250 million line of credit provided by SoftBank’s other troubled investment, Greensill Capital. The loan provider is not identified in the SPAC prospectus, but the size is similar to the exposure reported in January 2021 by a Credit Suisse Group AG supply chain fund for which Greensill acquired assets. The loan was paid off in the same month that Greensill filed for insolvency. The Swiss bank can count itself lucky, as other risky loans from Greensill have proved much harder to recover.

Another portion of the SPAC money went to $44 million in fees for the banks and law firms that worked on the deal. Goldman Sachs was a merger advisor at View and helped recruit investors for a separate $440 million pot that backed the SPAC transaction. Meanwhile, Cantor Fitzgerald’s bankers were hired to advise their own SPAC – a woefully common conflict of interest in SPAC land. (Cantor’s CF Acquisition Corp II is one of at least eight SPACs it created. Cantor ranked third last year on Bloomberg’s SPAC advisory chart, behind Citigroup Inc. and Goldman).

To be fair, Cantor disclosed the potential conflict, and the SPAC deal closed with a lower rating than what SoftBank gave View in 2018. Cantor also had more skin in the game than most SPAC founders, at least. initially. Receiving one-third of its free stock from sponsors (previously worth $125 million but now nearly worthless) was subject to achieving now likely unattainable stock price targets. And some of his consulting fees were paid in stock instead of cash. Cantor also invested another US$ 50 million in the transaction. It’s unclear if Cantor still has that much stock from View. A Cantor filing this week reported it owned just 8 million shares of View at the end of March, a reduction of more than 50%. He declined to comment.

Like most SPACs, it did not obtain an independent opinion on the value of the deal. This is something the SEC’s proposed rules would effectively require in future SPAC transactions, as well as forcing banks that underwrite SPAC IPOs to have legal responsibility for information in the prospectus, including financial projections.

It’s a shame, too, that there is no independent underwriter in this case, as the quality of Cantor SPAC’s preparation is being questioned by disgruntled investors who went to court in February to demand that he hand over information about his due diligence.

The odds of View becoming profitable quickly seem slim, so it should try to raise capital in a market that has suddenly turned sour with cash-burning tech companies.

His situation highlights why companies need to have robust financial controls in place before going public and why we need guardians with full legal responsibility for SPAC disclosures. The SEC reforms come too late for View investors, but they could help stave off another similar outburst.

More from Bloomberg writers Opinion:

You cannot bet on SPACs. Thanks, Gary Gensler!: Chris Bryant

The SEC Is Coming to SPACs: Matt Levine

SoftBank’s Son Survived Bigger Disasters: Gearoid Reidy

(1) My benchmark for a “large” SPAC deal was a business value in excess of $1 billion.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a columnist for Bloomberg Opinion covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

More stories like this are available at bloomberg.com/opinion

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