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The Massive Opportunity In Pre-Merger SPACs

Jul. 15, 2020 7:35 AM ETACTT, ACTTU, DKNG, FREE, FREEW, HOFV, NKLA, FSR67 Comments
WY Capital profile picture
WY Capital


  • Buying SPACs before the merger announcement and selling it after could be an opportunity to generate alpha in the current environment.
  • SPACs usually go up substantially after the merger announcement, yet trade near cash value before, creating a opportunity to generate high returns with very little risk.
  • Management is incentivized to purchase an exciting company to drive up the stock price.
  • I have generated decent returns from just holding pre-merger SPACs with good management approaching the liquidation date.

It is commonly thought in investing that one can only achieve superior returns by taking on high risks. However, with pre-merger SPACs, one could theoretically achieve high returns with minimal risks.

The opportunity

To understand this opportunity, you have to understand how SPACs work. A SPAC, like a normal IPO, raises money from investors to purchase a company and bring it to the public markets. There are 3 phases that most SPACs go through – pre-merger, merger announcement, and post-merger.

During the time it takes to find a target, a SPAC will usually trade near its cash value, which is usually close to $10. After announcing a solid deal, however, investors will evaluate the deal and usually bid the SPAC up. During this phase, since investors can still redeem their $10 in cash, the SPAC will still usually trade above $10. The last phase, the post-merger phase, only occurs after the SPAC closes the deal and the ticker changes. This is the most controversial phase – it is why many investors are wary of SPACs. After the ticker changes, investors can no longer redeem their cash and the merger closes. Occasionally, in the case of Nikola (NKLA), DraftKings (DKNG), etc., the SPAC could continue to increase in price, but most of the time the SPAC will collapse – See Hall of Fame Resort & Entertainment Company (HOFV), Whole Earth Brands (FREE), for recent examples. Below is an example from FREE:

Source: Google, WY Capital

I believe that buying pre-merger SPACs, which usually trade at $10-11, and selling these SPACs after the merger announcement, could be an opportunity to generate substantial alpha. Certainly, this strategy has performed very well over the past few months.

The main reason why this is so successful is that very recently, SPACs have mostly gone up after

This article was written by

WY Capital profile picture
Looking out for underrated companies that could shape the future of humanity, or just provide strong returns over the long run. Note that my opinions could change after conducting more research or based on anything, honestly. DYODD

Analyst’s Disclosure: I am/we are long NOVS, SOAC.U, ALAC, ALACW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (67)

Thank you so much for your patience and response. Where can we track the SPAC's merge date?
I have a question for you: I have a bunch of pre merger SPACs, currently are under the water. They either dropped a lot from the price I bought, or dropped to below $10. With the current market, there seems slim chances for them to go up.
Seeking advice here, should I just sell them, or keep them after merging? As always, the price could even drop more after merging. But if I sell them now, can I at least get $10 back? or it has some constraints?
WY Capital profile picture
@mmyy101 Swap to good quality SPACs that have already found targets for a few % premium. Examples are RTP(10.6), RAAC(10.4), ALTU(10.5), etc

Of course DYODD, but that is what I have done so far
joezapp profile picture
@mmyy101 The SPACs dropped with the overall market. Are you going to get nervous every time the market corrects and takes your investment with it? If you chose your SPACs wisely, I don't see what you're worrying about. If you can't handle price fluctuation, you shouldn't be in the market at all.
@joezapp What you said makes sense. I just own too many of them and bought them with higher price before. It hurts to see your basis cost is gone....I think I should have set the stop limit

My largest holding is DMYI. I bought today bc I saw that the management team announced last week that they are doing a 4th spac, so it it would make sense that they will announce the company that the 3rd spac is acquiring in the near term...the first two spacs by this mgmt team have doubled, so I convinced myself this is a sure thing. Buy now sell after the announcement pop....is this too good to be true?

WY Capital profile picture

@JMONEY93 There is a tiny chance that the SPAC will drop after the announcement - Look at FAII. For a "sure win" situation try to buy SPAC units below $11

@WY Capital sure enough DMYI announced its going to merge with IonQ (quantum computing apparently backed by Bill Gates, Amazon & Google)...popped like 30% early pre-market so I shot out of bed and starting dancing but then faded big time by 9am when i could trade. Sold 50% and set trailing stop on the rest.....So now i'll be interested to see if it pops again once the merger is finalized and fingers crossed I don't get stopped out $1 trail...
I feel that it is hard to find a SPAC trading under $11 that is also expected to make an announcement soon...I convinced a few friends to buy DMYI yesterday they think i'm a genius now LOL ...i feel like this SPAC thing will be short lived--itll eventually blow up on us or some sort of regulation will be put in place because it seems that the management teams have huge incentives to make something happen, whether good or bad
WY Capital profile picture
@JMONEY93 Look at $PTICU, $SCLEU, $CLAS/U, $NVSAU, all are around or below $11

I want to know what the difference is between a stock with "U" on the end of it and one that doesn't? Which one should you buy for your premerger strategy?

WY Capital profile picture

@cgarner124 The stock with a U is a unit, which contains a part of a warrant


@WY Capital thank you!

joezapp profile picture

@cgarner124 I prefer to get the warrant, too, so I lean toward the unit.

What do you think of the SPAC $AVAN? Doing some research the management team seems to be looking for a European based company with a good nexus to the US market. (Klarna is rumored to be a potential target acquisition)
WY Capital profile picture
Looks like a decent pick
Does one have to pay reorganization fee once these SPACs merge and start trading under new ticker? My broker is charging $38 as reorg fees. I am unsure whether SPAC mergers qualify for this charge? I had to sell my share a day prior to completion of the merger.
joezapp profile picture
@njomy You are with ETrade. I left them years ago for that very reason. No one charges reorgs anymore. Find a better broker. It was the right move to sell to save from getting fleeced $38.
Shll was at 55 dollars monday or tuesday now at 48. doubled my money in a less than a month. I hope most of the spaac go that well.
SmartStops profile picture
I am personally making like 50-500% off these SPACs. And some are launching really solid companies (vs. imho the whole nkla hype). Watch out for GMHI - as it's launching Luminar, a sv startup backed by Peter Thiel. GMHI Warrants still under $3 a share!
WY Capital profile picture
Congrats, i'm currently watching GMHI
@WY Capital

Congrats of buying Kcac units and getting 1/2 warrants for free!

Alberton Acquisition Corporation...didn't they announce redemption at shareholder meeting a few months back?


Own various parts of Kcac

graf warrant holder

Gore holdings in previous posted units and warrants like @SmartStops

starting a position in dphc for Lordstown motors. anyone familiar with DPHC
WY, why is KCAK one of your picks but you don't own it? and do you buy these companies at or below $10?
WY Capital profile picture
I do own it now. Usually I buy it above $10, but I have bought SPACs below $10 before
Does the return of capital apply to retail investors though? At that point aren't shares already transferred from their primary holder?
Does a SPAC Completion deadline refer to the announcement of the deal or full completion of merger when ticker symbol changes to the new company symbol?
joezapp profile picture
I've seen proxies for extensions after the announcement of the deal, so it appears to mean full completion of the merger.
My only SPAC investment was a company that did a merger with Pangaea Logistics Solutions Ltd (PANL) in 2014. I lost quite a bit on that venture because I stayed with the company for a few years before giving up.
Oddly, PANL used to be the ticker for the display panel manufacturer that is now listed as OLED. This makes it hard to filter for my transactions because they were both PANL at some point and I owned both. I made good money on OLED, but sold way too soon in 2016 at a third of the peak price.
SHLL is at 24 dollars now and will complet a deal with an EV company in September. Do I have to sell my spac shares and buy the seperate company or will they automatically be switched over. Its a merger.
@john boy

As I understand it, if/when the merger is successfully completed, SHLL shares will become HYLN shares automatically. Also, the price of SHLL shares will become the price of HYLN shares at the precise moment that SHLL shares become HYLN shares.
Jan Wigert profile picture
The ticker symbol 'SHLL' will automatically change to 'HYLN' on your trading account without you having to do anything.
Thanks so much for the information on shll and HYLN. I will cintinue to buy more.
I've seen SPACs jump in price when the SPAC announces a merger target.

After the announcement and price jump, the SPAC price usually declines.

Question: if and when the merger is successfully completed, does the SPAC price usually jump again?

And then what? Doesn't the new stock price usually fall again from profit taking -- especially when the big investors are later allowed to sell their huge amount of stocks and warrants?

It seems the small trader needs to time the price jumps and price falls -- and then, if the company has long term potential, the trader may become a long term investor when the stock and warrant prices are at low levels after the initial profit-taking.

Am I right?
WY Capital profile picture
Most of the time the SPAC price declines after the merger completes
@WY Capital

Thank you for your reply.

Most of the time, do SPAC prices jump not only when the SPAC announces a merger target, but also when the SPAC announces that the merger has been completed successfully?
Why buy SOAC now. You may have to wait for a long time for some popping. Dead money? Same with NOVS.

HCAC is better. Deadline is closing soon and some news may come!
WY Capital profile picture
HCAC's past targets don't really look exciting and the price is already up 10% from cash value
badger1997 profile picture
Excuse the newbie question as I am a relatively new investor still trying to learn the ins and outs of anything beyond just basic equity investments. What is the difference between SOAC and SOAC.U? If I am understanding it right, SOAC is the Class A shares and SOAC.U include a warrant? Correct me if I am totally off base there. Thanks.
BarbaraPaz profile picture
BarbaraPaz profile picture
Good luck!
Chris DeMuth Jr. profile picture
I would say that SOAC.U includes half of a warrant.
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