He is running a special purpose acquisition company (also known as a SPAC) worth 300m, that’s what. But what is that? A company with no product except synergy — that sounds like some nonsense from 30 Rock…
Unfortunately this is the same answer for the question — what is happening at Buzzfeed, why did Ezra Klein and Matt Yglesias exited Vox and why it will merge with Vice. Because all media companies with starting with V must merge to be some sort of Voltron?
The truth in the boutique media world is that a SPAC has come to save the day and combine many distinct assets into a larger stronger media company. Content is a weak king, it is that which we bedazzle with advertisements and gate with subscriptions, but is painfully dependent on the advertising duopoly.
The Case for Vertical Integration
When you are operating in an ecosystem of firms there are two major problems: the firms that you depend do what they are going to do and they are busy consuming ecosystem resources. What does that really mean? If there are going to be a bunch of companies, they are all going to need money. If you believe that all the money in the ecosystem is rightfully yours, you might get jealous of the other firms. Why shouldn’t a doughnut maker also own a flour mill?
Surely if you owned all the elements of a business you would make all the money, at the same time you would take on all of the risk. This is a central problem with vertical integration: firms that vertically integrate can experience dramatic increases in risk. Instead of the risks in running a bakery, you now must mange dramatically increased risk, both in degree (more total risk) and kind (new risks you didn’t see before). In the world of media production, vertical integration can really mess up your decision making. Instead of passing on bad pilots, you paid for one pilot so you are going to make the show.
Coase argued that integration was among the most powerful strategies to reduce contract ambiguity. If your supplier or distributor units are part of your business, you might simply control them directly. No need for countervailing incentives, more control. The inverse of this is the condition in Post-Fordism, where companies try to disintegrate all elements of material property. More on that another time…
At the same time, this narrative of the benefits (and drawbacks) hinges on the company actually existing. A SPAC is a little different as they have no business, as such they tend to IPO at a particular price until they do their work of buying the right combination of companies. This activity is growing exponentially. The case for such an instrument is that it brings access to alternative investments to everyone, it is a democratizing engine. Rather than Stanford’s endowment and hedge funds having special access to “alternatives” everyone can, at a stable share price. On the other hand, it is also becoming clear that access to alternatives is leading to a university endowment crisis, as argued quite effectively by Kelly Grotke. It makes sense that a combination of hubris and naivete would lead universities to simply hand their fortunes to hedge funds and then to become the obvious marks in Schwed’s classic: Where are the Customer’s Yachts? The customers have no yachts and when you pay the management fees of a hedge fund, you won’t be making much money. Now those fees may be decreasing because, wait for it, there are simply not enough ultra-lucrative investments to sustain them. For those of you playing along at home, if you assume a $1000 dollar base and a 10% return, the standard 2–20 fee for a hedge fund means you reach $2091 in 14 years (that is not fast), while paying $791 in management fees. It makes sense then why your retirement program at work emphasizes low expenses…
There also may also be an anti-trust argument for SPACs. Among the most damaging things about the duopoly (Fb and google) is the effort to simply buy and kill all startups. SPACs could offer a way for those companies to actually develop and thrive. At the same time, this could just as easily be done by actually enforcing anti-trust laws. But this seems like a ridiculous remedy.
Wall-Street 3: The Rise of the Eleph-i-corn
Lanahan et al (linked in the heading) use the term Eleph-i-corn to describe mature unicorns, successful businesses that need money to actually function. In a world of meme stocks, mere billion dollar unicorns seem down right banal. We now celebrate the disconnection of valuations from actual business activity. To the moon is the rallying cry of those strategically reversing these power relations. Don’t hate the players, hate the game.
The SPACs are the true Eleph-i-corns, no longer the slight horned horse, but heavy lifters. They represent a new turn in how we think about the value of spurious assets. The synergies these firms unlock should produce the yields promised by the hedge funds. Think of it this way: if a hedge fund made a buy in a potential unicorn someone eventually needs to cash out that investment, that could be another fund, an IPO, or possibly the actual success of the company. Of course none of these are fast and frankly they may not be that lucrative. The IPO market for actual companies is cold. SPACs then produce a synthetic IPO market that collects the vast sums of money needed to justify the valuations of alternative assets in the first place.
Ultimately, the deep structural problem here hinges on overcapitalization in a mature economy. Yes, there is such a thing as too much money. Flimsy schemes in a world with too much money make unreasonable returns appear reasonable. Without getting to far into the weeds, this is the danger of financialization for a hegemonic state: the ability to access abstract business because of hegemony will destroy the underlying economy. An economy can drown in money, overcapitalization is insidious.
What is your take away? Starting in mid-2020 a rapid acceleration in the use of SPACs has seen dramatic concentration of capital. These firms may democratize access to the alternatives pool, but that pool was already over-utilized and further concentration of economic activity leads to real problems. While some firms may be cashed-out by the SPACs the move into these instruments is most certainly a bubble. The SPACs are going to overheat an already over-crowded market for alternatives. That’s what Paul Ryan is doing.