Goldman Sachs (GS) filed an S-1 on May 18, 2018 for a special purpose acquisition company (SPAC) where Goldman is the underwriter and GSAM is the financial sponsor in combination with David Cote, former CEO of Honeywell.
In a hot PE market, Goldman is somewhat limited on what the company can do due to the Volcker rule. The SPAC that they filed is a way for the company to still execute on a PE-style strategy while not actually launching a new PE fund.
The $600MM+ raise is a relatively large SPAC and is structured with a compelling risk-reward outcome for the company. The company will have 24 months to make a successful acquisition and further plans to use the newly public company as a vehicle for further acquisitions.
There are a wide range of outcomes, but looking at a few scenarios illustrates how this could be the beginning of a trend. These are not exact numbers, but roughly in the right ballpark.
- If there is no acquisition, then Goldman loses about $2MM and the time of one it's senior executives who is on the board of the SPAC.
- If there is an acquisition that takes the stock up modestly to $11.50, then Goldman will get somewhere in the ballpark of $30-40MM of underwriting fees plus up to $200MM as the sponsor (with Cote).
- If the stock goes to $18 post-acquisition, then Goldman gets the underwriting fees plus potentially over $350MM.
- There are lockups involved and a poor acquisition could drive the stock price down with Goldman taking a significant loss over time. Although this is common with SPACs, my view is that Goldman has a much better chance than most SPACs to find a solid acquisition target.
David Cote has quite a successful track record in building Honeywell as CEO from 2002 to 2017. HON was trading at under $20 in 2002 and was over $150 in 2017.
It is reasonable to expect to see some other banks launch similar SPACs in the coming months. And if Goldman can make the acquisition a success for this SPAC, then perhaps SPACs may emerge as more mainstream vehicles for banks and asset managers to consider as options to get meaningful economics on a deal structure that has a liquid exit built in.