After a failed merger, LVMH and Tiffany will head to the courts next year

Last November, the French conglomerate LVMH, which owns Louis Vuitton and dozens of other fashion and lifestyle brands, struck a deal to acquire jewelry retailer Tiffany & Co. for $16.2 billion. Bernard Arnault, the CEO of LVMH, described Tiffany as an “American icon” that would “thrive for centuries to come” in the LVMH portfolio. If the deal had gone through, it would have been the biggest ever in the luxury sector. In an unfortunate turn of events, however, the deal went sour. Now, the French government is involved, and LVMH and Tiffany are planning to head to court.

So, what went wrong? Last month, LVMH announced that it received  an unsolicited letter signed by French Foreign Minister Jean-Yves Le Drian. The letter recommended that LVMH attempt to delay the acquisition until January 2021, as France and the U.S. were bickering over trade tariffs on luxury goods. Although the French government is not an LVMH stakeholder, a source from the French government described the letter as having “political value” and a goal to alert LVMH before the November 24th closing date. The letter could have been intended to protect LVMH’s business interests— an unusual move from the French government. However, some speculate that the letter was an attempt to discourage the U.S. from imposing retaliatory tariffs in response to French taxes on American technology companies.

LVMH may have had other motivations for pulling out of the deal: the pandemic and subsequent global recession has hit luxury retailers hard. In fact, speculation began in April that LVMH might try to back out of the acquisition because of COVID-19 after a private equity player tried to abandon its deal to buy Victoria’s Secret. At that time, Tiffany shares were only down 6% year to date–$9 lower than the LVMH bid–even though its U.S. and Canada stores were closed. After LVMH announced its plan to back out, Tiffany stock plunged 10%.

Now, LVMH and Tiffany are gearing up for an acrimonious court battle, with the trial date set for January in Delaware’s Chancery Court. Both companies are asserting claims against the other: Tiffany is suing LVMH for breach of the merger deal and failure to secure regulatory clearance for the deal in Europe or Taiwan, while LVMH is countersuing for Tiffany’s alleged mismanagement during the pandemic. If LVMH can show that Tiffany had suffered a “material adverse effect” due to COVID-19, then it will be able to walk away from the contract without any obligations. Tiffany wants to force LVMH to move forward with the acquisitions in accordance with the originally agreed-upon terms.

While Tiffany originally sought to have the trial start next month — before the acquisition contract’s “drop-dead” deadline of November 24th — the Delaware court agreed to fast-track legal proceedings in a four-day trial starting on January 4th. In the meantime, Joseph Slights, a Vice Chancellor of the Delaware Court of Chancery, has urged both sides to engage in “productive discussions to avoid the need for litigation.”

Despite Risks, Lufax Eyes A U.S. Flotation

Lufax Holding Ltd., a leading tech-enabled retail borrowing and wealth management platform in China, filed on October 7 with the SEC to raise up to $100 million in an IPO on the NYSE, aiming to raise about $3 billion soon. This news comes in the shadow of the ongoing U.S.-China trade war and increasing hostility from the U.S. administration toward Chinese companies.

Why did Lufax choose to pursue an IPO during such an extremely uncertain period? Typically, the direct answer would be either economic or non-economic, and given the current climate, it’s difficult to say that this is a compelling economic decision.

President Donald Trump has recently threatened to delist Chinese companies from U.S. stock exchanges. Thus, all Chinese based public companies in America will likely face heightened compliance costs. To make matters worse, recent scandals have caused investors to feel uneasy about betting on Chinese companies. China-based Luckin Coffee Inc., announced a huge scandal in April, acknowledging its chief operating officer had fabricated the company’s 2019 sales by around $310 million. Consequently, investors in the U.S. are increasingly reluctant to purchase stocks of Chinese companies without significant discounts. In fact, after the “Huawei Ban” & Tiktok disturbance, many Chinese companies, like JD.com, NetEase, and Jack Ma’s Ant Group, have given up on the idea of listing in the U.S., instead seeking to list in Hong Kong or Shanghai.

While LuFax’s IPO is a bold attempt, the motivations behind it are thoroughly considered. Regardless of the performance of Lufax, several factors may affect its long-term benefits from a U.S. IPO.

First, LuFax’s executives may not believe that financial ties between China and the United States will decouple in the long run. Conversely, such a connection will probably strengthen since the two countries have almost touched each other’s bottom line and settled unnecessary conflict.

Second, LuFax’s parent company, Ping An Group, has a highly dispersed share ownership–no single shareholder, or affiliated group of shareholders, has control over the firm. The board of directors of Ping An Group is also highly diverse compared to many other companies listed on the Shanghai or Hong Kong stock exchanges. This could offset the discount on LuFax’s stock price and reduce compliance costs.

Third, like LuFax, many Chinese companies are encountering the problem of local capital scarcity. The Shanghai and Hongkong stock markets have never been the primary source of financing for most Chinese companies–the government and banks are. However, to control the banking system’s recent debt risk, the Chinese government has restricted banks from lending money to companies. Thus, access to a securities market as mature as NYSE will still be a huge advantage for the company.

In conclusion, Lufax’s IPO has shown strong economic and strategic motivations for the Chinese companies to list on the U.S. securities market and may indicate an upcoming contra-flow. If the U.S.-China relationship moves toward cooperation rather than all-out confrontation or national isolation, the SEC and China’s regulators, the SEC and China’s regulators will likely need to coordinate in the regulation of these types of cross border flotations.

Coronavirus Stimulus Bill Negotiations Back On

Last Tuesday, President Donald Trump seemingly ended negotiations with Democrats over a new coronavirus relief bill. Stocks fell after the President’s tweet, with the Dow Jones Industrial Average ending down 376 points. Facing mounting political and public pressure to strike a deal before the election, the President changed his tune hours later, suggesting he was willing to negotiate if the massive relief bill was broken into smaller stand-alone bills, including airline relief and stimulus checks.

On Friday, the President once again changed his stance, this time offering a $1.8 trillion proposal to Speaker Nancy Pelosi, the most substantial offer yet from Republicans. Both parties plan to work throughout the weekend to try and reach a deal.

Republican and Democratic lawmakers have been negotiating an additional economic stimulus for months, both agreeing that the bill should include aid for unemployed workers, small businesses, schools, and public-health efforts, among other measures. But they have remained at odds over the amount necessary to provide relief.

Many Republicans are opposed to a large new round of deficit spending and expressed more confidence that the economy is recovering. Thus, they were originally unwilling to spend more than $1.6 trillion on a coronavirus relief bill. Democrats, on the other hand, believe a larger package is necessary to provide relief to American households and businesses still experiencing the economic impact of the pandemic. Last week, House democrats passed a $2.2 trillion coronavirus relief package, down from their initial $3.4 trillion proposal. Their bill proposed widespread financial support to those affected by the pandemic, including restaurants, airlines, and the postal service, and an additional round of direct checks to Americans of $1,200 per taxpayer and $500 per dependent. The bill would also renew the $600 in supplemental unemployment aid.

While the Trump Administration’s latest offer brings the parties closer than ever on the additional stimulus, they remain divided over substantial differences in the allocation of funds. The Trump Administration’s offer allegedly includes $300 billion of federal aid to state and local governments, up from the $250 billion they proposed last week. Democrats, however, included $436 billion for state and local governments in the bill they passed last week. This was already a substantial drop from the more than $900 billion Democrats initially sought.

Economists have expressed fears regarding our economic recovery if no coronavirus relief bill passes. They point to stalling job growth and the need to prevent a drop in household spending, and they are worried that temporary layoffs will become permanent as businesses remain shuttered for good. Federal Reserve Chairman Jerome Powell said this week that too little economic support from Congress would lead to a weak recovery, outweighing the risks of providing too much.

Even if the parties are able to reach a deal on coronavirus relief, it is unknown how soon the American people would benefit, with Senate Majority Leader Mitch McConnell expressing he plans on prioritizing the confirmation of Judge Amy Coney Barrett to the Supreme Court.

Silicon Valley’s Response to George Floyd and Racial Justice

After the murder of George Floyd, the Internet saw an upheaval on their social media timelines like never before—Black squares, hashtags demanding justice, and guides on how to support the Black community. Shortly after, we saw releases of employee memos, donation matching programs, and official statements by Big Tech about their stances on fighting racial injustice. Apple CEO, Tim Cook, condemned Floyd’s killing and acknowledged racial injustice in America, saying the company will “reexamine our own views and actions in light of a pain that is deeply felt but too often ignored.” Other tech giants released statements echoing that sentiment. Facebook and Amazon each donated a whopping $10 million to organizations working towards racial justice. Microsoft and Airbnb matched employee donations to eligible organizations, while Lyft donated $500,000 in ride credits to Lake Street Council in Minneapolis to help volunteers in rebuilding efforts as protests ensued. But what more can the Silicon Valley do to sustainably support Black Americans now that timelines have settled, and what changes have these companies implemented since their official statements?

With Americans feeling the brunt of COVID-19, the political unrest over systematic police brutality, and the upcoming November election, activists are urging eligible voters to show up to the polls. From Tik Tok dance videos to Instagram infographics explaining what’s on the ballot, people are using their social media to encourage their followers to vote—not just for the next President of the United States—but also for their equally important local and state representatives. Big Tech has jumped onto this trend. Yelp and Instagram are using their platforms to integrate features promoting civic engagement, such as voter registration portals and ads.

While it is no dispute that voting has the power to yield dramatic change, reversing decades of deeply embedded structural inequality often takes decades. For this reason, activists are also encouraging everyone to contribute to the economic enrichment of Black Americans by supporting Black-owned businesses.

Although we’re seeing an upward trend in Black-owned businesses, they face a number of obstacles stemming from centuries of enslavement, Jim Crow laws, and historical divestment. A Brookings and Gallup study found that Black people represent 12.7% of the U.S. population but only 4.3% of the nation’s 22.2 million business owners. Of that 4.3%, only 1% of Black business owners obtained loans in their founding year compared to 7% of white business owners. This equates to a loss in annual business revenue of approximately $3.9 billion.

To address systemic underinvestment in Black businesses, Silicon Valley needs to step up with actionable change that directly influences the economic mobility of Black entrepreneurs, and some important players are taking noticeable action. SoftBank announced a $100 million investment vehicle, the Opportunity Growth Fund, which will invest in companies led by founders and entrepreneurs of color. This is a step forward in rectifying the economic imbalance for Black entrepreneurs, as just 1% of VC-backed founders are Black. Facebook initiated similar efforts, and pledged to invest “over $1 billion to support Black and diverse suppliers and communities” in the U.S. through grant programs and to direct commerce with Black-owned small businesses. Facebook also created Lift Black Voices—a space curated to amplify Black-owned businesses, fundraisers, community voices, criminal justice reform, and more. These types of investment in Black-owned business and communities, among many other initiatives, are essential in Silicon Valley’s duty to fight racial justice.

Nothing can undo the lost lives of the countless Black Americans due to police brutality.

George Floyd. Breonna Taylor. Sandra Bland. Tamir Rice. Oscar Grant.

What the country must do to move forward is not only contingent on grassroots organizers, Americans’ civic engagement, or our elected officials, but also sustainable change from Big Tech. This requires change beyond corporate outrage and donations; the movers and shakers in Silicon Valley can and should work towards remedying the economic disparity of Black Americans through meaningful action.

To directly support racial justice organizations working towards the social and economic mobility of Black Americans in the Bay Area, consider getting involved and setting up a monthly donation to OCCUR and East Oakland Collective.

The Not So “Big Short” of Nikola

Nikola Corp., the rising green vehicle company lauded as “the next big thing” in the automotive industry, has been monopolizing headlines lately for all the wrong reasons. After a report was published by Hindenburg Research  accusing the company of lying about its products and deals, the Securities and Exchange Commission (SEC) launched a probe to investigate Nikola for potential fraudulent representations of “its business prospects” to investors. This led the company founder and executive chairman Trevor Milton to step down from his role and BP to rescind their deal regarding the construction of hydrogen refueling stations. This sequence of events drove Nikola shares down 45%.

But what gave rise to suspicions about the company’s intentions and practices in the first place was the sale of 7 million shares by Milton right after the IPO at a price of $10 per share. This indicated to investors that the founder and chairman deemed the stock price inherently overvalued. Early short sellers supported this notion noting that the innovations and technology that would support the market’s predictions of the firm’s inherent value and stock price were neither secured by patents nor supported by research papers. However, the fraud allegations came after Nikola published a promotional video showing one of their hydrogen trucks moving “under its own propulsion,” which the short-sellers claimed to be a truck rolling downhill. Nikola later admitted the truck was not in motion on its own propulsion, but rather rolling downhill.

Despite the allegations by Hindenburg Research, Nikola’s strategic partner General Motors (GM) reported that they are not backing out of the deal. GM CEO Mary Barra informed the public that it was a “partnership made in heaven” as GM would receive $2 billion worth of stock (11% of Nikola)in exchange for Nikola using GM’s battery and fuel cell technology as well as producing Nikola’s first product, the Badger pickup truck. After Milton’s resignation analysts suggested that GM could increase their stake in Nikola in order to mitigate Nikola’s stock price drop. This news led to a 15% increase in Nikola’s stock while also increasing GM’s stock by 2%.

Analysts also predict that Nikola is here to stay. JP Morgan analysts have rated the company as a strong “buy,” predicting that  shares will reach $41 within one year. This rating comes even after some analysts have pointed out that Nikola’s inherent value is zero as the company lacks product and revenue and the share price has tumbled more than 52% since drawdown. However, JP Morgan’s rating has been backed by other industry heavyweights such as Deutsche Bank and Cowen, supporting that Nikola is a “story” stock for future gains. Pointedly, JP Morgan analysts predicted that by 2027 Nikola has an earning potential of approximately $1.6B EBITDA, with subsequent upside on the company’s stock.

One question remains to be answered. How did a company with zero revenue become public and manage to reach a $34B market cap? Nikola did not have the listing requirements for a traditional IPO. To overcome this, Nikola went public through a special purpose acquisition company (SPAC), effectively having the requirements for listing waived. This fact, combined with the market frenzy for environmentally friendly automotive stories, led a company with zero revenue and no product to reach a market cap of $34B. The market might be heading in the right direction by supporting these stock market stories, but it should not forget where similar stories led during the rise of the internet in 1999.

Forced Labor Camps in China Pressure U.S. Companies to Reevaluate Global Supply Chains

Reports of forced labor camps – not unlike those widely used by the Nazi regime throughout the Second World War – in the Xinjiang region of China have become increasingly widespread in recent years. Images from these detention camps and reports coming out of the region indicate that the Chinese government has detained approximately one-million Uighurs, a Muslim minority living primarily in the Northwestern region of China, since 2018. Although Chinese officials insist that these camps are mere vocational-training camps aimed at eradicating violent extremism among the Muslim population, the United States and other foreign entities remain unconvinced.

After months of President Trump refusing to acknowledge the human rights violations taking place within these labor camps, opting instead to preserve favorable trade relations with the Chinese government, his administration has finally adopted a new approach marked by sanctions, memos, and Withhold Release Orders (WRO). Likely sparked by a downturn in trade relations with China, President Trump and his senior officials, including Secretary of State Mike Pompeo, now have taken to the media to publicly condemn the Chinese government for its mistreatment of the Uighur population, warning CEOs of U.S. corporations to “be aware of the reputation, economic and legal risks of supporting such assaults on human dignity.”

The Trump administration, however, has gone much further than mere public statements. Three recent developments stand out. First, the Commerce, Treasury, Homeland Security, and State departments released a (nonbinding) nineteen-page memo urging U.S. companies to refrain from sourcing goods traceable to human-rights abuses in the Xinjian region. Second, the Treasury and State departments imposed sanctions on senior officials in China’s Xinjiang region for their roles in the state-sponsored violence under the Uyghur Human Rights Policy Act of 2020. And third, most recently, the U.S. Customs and Border Protection (CBP) issued five WROs on goods and materials produced in labor and mass detention camps in the Xinjiang region. Mark A. Morgan, the Acting CBP Commissioner, urges the public to view these WROs as a “clear message … that [the U.S.] will not tolerate the illicit, inhumane, and exploitative practices of forced labor in U.S. supply chains.”

Mr. Morgan is entirely correct to presume that the effects of these WROs will implicate U.S. corporations’ supply chains. In fact, because the Xinjiang region produces approximately 85% of all cotton produced in China, those companies forced – for legal and/or reputational reasons – to find suppliers elsewhere will see their global supply chains greatly disrupted. This possibility has only become increasingly likely as several prominent, international auditors have released statements that they will no longer provide labor-audit or inspection services in the Xinjiang region.

With international concern mounting in response to global media coverage of these forced labor and mass detention camps, companies who source materials from Xinjiang, like Gap Inc. and Kraft Heinz Co., find themselves facing a serious dilemma. Ethical, legal, and public relations considerations weigh in favor of, at the very least, not sourcing materials from forced labor camps in Xinjiang. However, the economic effects of such production upheaval and redirection could harm or even bankrupt some companies. It remains to be seen how many of these multinational enterprises will respond to this growing public pressure.

California’s Impending Ban on New Sales of Gas-Powered Vehicles

On September 23, 2020, California Governor Gavin Newsom announced an executive order effectively banning the sale of new fossil-fuel powered passenger vehicles in 2035 and medium and heavy-duty trucks in 2045. Gas-powered vehicles sold before these years can still operate and be sold in the used-car market. The order would make California the first state in the nation to mandate the sale of zero-emission automobiles and is set to accelerate global car manufacturers’ burgeoning transition away from combustion engines should it survive court challenges by fossil fuel-industry aligned groups and the Trump administration.

Climate change played a key role in Newsom’s decision. Severe wildfires generated partially by weeks of record-breaking heat have devastated California, forcing mass evacuations of major cities, rolling power shutoffs, and dangerous air quality throughout the state. Research indicates that taking all gas-powered cars off the road in California would reduce carbon emissions by nearly 35%. In addition, California has seen usage of passenger vehicles plummet in recent months due to the COVID-19 crisis. With more people working from home than any other time in living memory, demand for automobiles has plummeted—marking a key opportunity for California to shift away permanently from fossil fuels.

Over the next decade, California will have to continue to develop the infrastructure necessary to handle this important transition. State energy companies, working in concert with Sacramento, have invested millions into ever-growing electric vehicle charging networks, and created tax rebates designed to incentivize electric vehicle purchases. The state’s major regions have also taken initiatives to create more robust and user-friendly public transportation systems that can potentially serve as more convenient alternatives to cars. This includes new subway lines in Los Angeles and San Jose, Bus Rapid Transit expansions in San Francisco, and the long-awaited high speed rail system connecting Northern and Southern California. City planning in the state is also shifting to favor dense homes in urban areas better connected by public transit services over traditional car-centric suburbs.

Newsom’s move will likely accelerate the ongoing transition of automobile manufacturers across the world towards electric vehicles. Some manufacturers, such as Ford, have openly embraced California’s new zero-emission vehicle mandate. GM, which scrapped nearly the entirety of its lineup of gasoline-powered sedans, is gearing up to introduce 12 new electric pickup trucks and utility vehicles. Japanese manufacturer Toyota, which has long pioneered hybrid powertrains, projects it will sell 5.5 million electric cars by 2025—which would comprise nearly half of its global sales figures.

While California’s new executive order will hasten improvements in electric vehicle infrastructure and technology, it is also likely that the mandate will be met with resistance from the Trump administration, whose EPA recently blocked California from enforcing its own emissions requirements, which are more stringent than the federal standard. Ultimately, the fate of the executive order may rest with the upcoming general election. While a second term would embolden President Trump to continue to weaken the power of states like California to set separate emissions standards, a prospective Biden administration—with its own goals of making the country carbon-neutral by 2050—would likely give California the green light to continue on its aggressive push for zero-emission automobiles.

Only time will tell, but California’s action will likely reverberate across the global car market for years to come.

Airbnb’s Comeback and a Decision to Go Public

COVID-19 has drastically changed how people travel, shattering past travel trends and conceptions and leaving the travel industry scrambling to adjust. Yet, amidst the global shutdowns and travel restrictions, Airbnb has made a surprising comeback and announced its plans to go public last month.

Just a few months ago, however, things seemed bleak. In mid-March, Airbnb and other related industries experienced severe losses in revenue as travel came to a halt and people swarmed to cancel bookings. According to AirDNA LLC data, Airbnb lost nearly $1.5 billion in bookings. In May, Airbnb predicted its revenue for 2020 would be less than half of what it was the previous year, and the company laid off about a quarter of its workforce. Over the same time, according to the Wall Street Journal, Airbnb’s valuation fell from $31 billion to a recent $18 billion.

Yet, since the spring, things have been looking up for Airbnb. According to Edison Trends, Airbnb’s spending since early May has been consistently higher than that of Marriott, Hilton and InterContinental Hotels Group. While Airbnb has gained back and added an additional 41% over the week of March 2nd, each of the hotels only gained about 38% of what they had lost. Airbnb stated that on July 8, there were more than 1 million nights of future stays that guests booked around the world, which was the first time such a level was hit since March 3. But while people seem to be traveling again, they have adapted particular preferences that are notably different from before COVID.

The current appeal of homestay over hotel nights often relates to the travel location. People seem to prefer more remote and less populated destinations as they take advantage of remote work and go on Staycations. Airbnb reported that over 60% of the bookings made on July 8th were located outside of cities. The future of Airbnb’s business, however, remains unclear, as people will physically return to work and school after travel restrictions ease. Airbnb’s preparation to go public is similarly shrouded in uncertainty, and is contingent on how the future of travel pans out. The impact of COVID is hard to predict and the outlook remains ambiguous and volatile.

Lyft and Uber have shown the potential failure to create profits after their IPOs, and WeWork has demonstrated that immense losses can incur when a business attempts to go public. Yet, in 2020, although many businesses are having difficulties, there have been more than $60 billion in U.S.-listed IPOs and IPO activity has not slowed down. According to the Wall Street Journal, IPOs for this year are already posting the biggest gains during trading debuts since 2000. Perhaps, then, this might be the right time for Airbnb to take the risk.

TikTok’s Last-Minute Injunctive Reprieve

The Trump administration is attempting to curtail the U.S. use of Chinese communication apps, invoking national security concerns—namely, data sharing with the Chinese government. In recent weeks, two separate judges blocked the efforts targeted at TikTok and WeChat. Neither judge questioned the government’s substantial national security concerns in pursuing the bans. Both, however, were unconvinced that a complete ban was necessary, or constitutional. Judge Carl Nichols, responsible for granting TikTok’s reprieve, held that the government’s proposed ban “overstep[s] its authority” and “likely exceed[s]” the bounds of the law.

President Trump issued a pair of executive orders in early August, seeking to remove TikTok and WeChat from the U.S. app store; the apps were set to be removed last Sunday. The executive orders “shocked” both companies. To others, the executive orders fit squarely within the Trump administration’s expansive campaign against China in the face of the upcoming election.

After a California federal magistrate temporarily blocked the proposed ban of the WeChat app out of concern for First Amendment issues, Judge Nichols issued a preliminary injunction for TikTok, hours before the ban was to take effect. TikTok is currently still available on app stores. Judge Nichols, who was appointed to the bench by President Trump, was concerned that “this was a largely unilateral decision with very little opportunity for plaintiffs to be heard.”

Importantly, Judge Nichols expressed skepticism surrounding the authority that the government cited in justifying the ban: the 1970s International Emergency Economic Powers Act. In his opinion, the judge held that the law does not allow the prohibition of certain personal communications, including art and photographs, which the proposed ban would prevent. He opines that the proposed ban, as justified, is thus an overstep of government authority, warranting a preliminary injunction.

While the judge’s order only grants temporary reprieve, it does afford TikTok more time in its pursuit of a deal with Oracle to create TikTok Global. The data management of the new entity would be based in the U.S.; in distancing itself from its Chinese parent company, TikTok hopes to alleviate regulators’ national security concerns.

The road ahead is not easy for TikTok. The company must continue working out the details of its Oracle deal, and if a deal is closed, convince the government that it sufficiently reduces national security concerns to remain in U.S. app stores. At the very least, the injunction grants TikTok more time to save itself, but the clock is ticking.

The Slow Death of the Traditional IPO

In October 2019, former Facebook executive, and current CEO of Social Capital, Chamath Palihapitiya announced that his Special Purpose Acquisition Company (SPAC) was acquiring Virgin Galactic. The deal –  a “reverse merger” – involved Palihapitiya’s publicly traded corporate entity acquiring Virgin Galactic in order to take it public. On the floor of the New York Stock Exchange (NYSE) Palihapitiya declared: “these kinds of transactions and processes are the future. A lot of that traditional oligopoly and monopoly run by Goldman [Sachs] and Morgan [Stanley], those days are numbered.”

With that proclamation Palihapitiya was predicting the decline of the traditional Initial Public Offering (IPO), which is historically the most common way for a private company to raise capital while achieving liquidity through the public markets. Since then, SPACs have become increasingly common vehicles used to take companies public. In 2020 over $36 billion was raised via SPAC, which is more than double the previous record set in 2019. Further, almost half of the public listings in 2020 have been SPACs. It appears these previously obscure investment vehicles are here to stay.

Generally, this is how SPACs work: a SPAC sponsor raises money in the IPO process and uses that capital to search for a private company to acquire and take public. The Wall Street Journal referred to SPACs as “big pools of cash, listed on an exchange, whose sole purpose is to do an acquisition.” That is why SPACs are often called “blank check companies.” Palihapitiya originally raised $600 million in 2017 for the SPAC that ultimately acquired Virgin Galactic in 2019.

SPACs offer several advantages over traditional IPOs, which involve hiring investment banks that spend months raising capital from institutional investors. Alternatively, SPACs provide a quicker and simpler route. According to Bloomberg Law, “the appeal of SPACs lies in their combination of the benefits of an IPO and the flexibility of M&A, all at a reduced cost and in a faster timeframe.” Amid recent volatility and uncertainty, this option has been particularly appealing for many companies.

Palihapitiya isn’t the first investor to seek out alternatives to the traditional IPO process. Benchmark Partner Bill Gurley, one of the best known venture capitalists in Silicon Valley, has called for early stage companies to look for new paths to the public market. “In the past three years it’s gotten worse and I think that’s because the IPO process has devolved,” said Gurley on CNBC in 2019.

Jay Ritter, a professor at the University of Florida, published a paper that Gurley frequently cites. Ritter found that investment banks have “less focus on maximizing IPO proceeds due to an increased emphasis on research coverage.” Ritter also claims that “allocations of hot IPOs to the personal brokerage accounts of issuing firm executives created an incentive to seek rather than avoid underwriters with a reputation of severe underpricing.” In other words, the traditional IPO contains an array of conflicts of interest. As a result, investment banks have often mispriced companies to the benefit of underwriters and to the detriment of the issuers’ long-term shareholders.

In addition to SPACs, companies are also going public via direct listings. Direct listings cut out the middlemen involved in a traditional IPO. They also don’t involve raising capital. In a blog post earlier this year, Gurley wrote that direct listings are “much simpler than a traditional IPO. You just remove the two steps where the shares are intentionally underpriced and then given to the investment bank’s best clients … then you jump straight to the market-based match.” Many prominent companies are choosing direct listings over IPOs, a trend that began with Spotify’s direct listing in 2018. This September the data-mining company Palantir completed a direct listing on the NYSE.

For the first time in decades the traditional IPO has serious competition. There is no longer only one path to the public markets. While the traditional IPO won’t go away overnight, the rise of SPACs and direct listings is creating a new landscape in the capital markets.