the money game

The Not-So-Happy Story of the World’s Biggest SPAC

SPAC man. Photo: Bloomberg via Getty Images

Bill Ackman isn’t known for always being right. He is, however, known for influencing large numbers of other investors, selling them on his ideas, and sometimes making them lots and lots of money — but also sometimes being disastrously wrong, failing to deliver on his promises, and losing lots of everyone’s money in the process. Early last year, Ackman made billions of dollars betting the markets would fall as COVID spread around the globe. A few years prior to that, he lost a fortune on a high-profile bet that he could get supplements-maker Herbalife declared a pyramid scheme by regulators (who declined to do so).

The impressive portion of his record allowed Ackman, the billionaire founder and CEO of hedge fund Pershing Square Capital Management, to raise $4 billion for his own SPAC a year ago. SPACs — or “special purpose acquisition companies” — are blank-check entities designed to provide a speedy and simple way for private companies to go public through a merger. Ackman’s project, known as Pershing Square Tontine Holdings (and often referred to by its stock-ticker symbol, PSTH), is the largest SPAC ever created, even amid the mania for SPACs playing out on Wall Street and in Silicon Valley over the past couple of years. The promise of Tontine was that Ackman would find an appealing investment opportunity in a private company and that — through the magic of SPAC-ing — shares in PSTH would become shares in that other company. But, of course, no one knew what that opportunity would be. So anyone buying PSTH was making some sort of a blind bet on Ackman: that he would find a great deal and get the merger done.

There were a lot of investors eager to make that bet. With Ackman’s reputation for big ambition along with the record size of the SPAC, the speculation around what private company would go public through Tontine was fevered and wide ranging — early guesses ranged from Airbnb (which Ackman approached last summer before it went public) to the sandwich chain Subway. Ackman didn’t exactly try to cool the hype, bragging in an investor letter that Pershing Square had to cut the road-show marketing tour for the SPAC short, on its second day, after investors wanted to pour in more than $12 billion — three times his goal. Besides Ackman’s reputation, the terms of the deal were appealing to many investors. Ackman, in a rare move for an investor creating a new SPAC, would collect no fee, pitching it as a way for everyday investors to invest alongside him on a relatively equal playing field for once. “We designed PSTH to be the most investor- and merger-friendly SPAC in the world,” Ackman wrote. “Apparently investors agreed.” One hub for these investors was Reddit, where they shared hopes, dreams, gossip, and speculation in the well-trafficked group r/PSTH. They refer to themselves as “Tontards” and sometimes “Tontinites.” Their numbers grew over the past year to more than 16,000.

But now many of Ackman’s investors, on Reddit and otherwise, have soured on his handling of PSTH. Last month, instead of a merger, Ackman announced that the SPAC would acquire a 10 percent stake in Universal Music Group when it finalizes plans to spin out of Vivendi, the French media company. Pershing Square Tontine investors would meanwhile become holders in a sort of mini leftover SPAC as well as a newfangled asset Ackman invented and dubbed a “SPARC.” Then this week, around 2 a.m. Monday, Ackman announced that actually none of that would happen. The Securities and Exchange Commission had essentially thrown a “a dagger in the heart” of the deal, questioning its eligibility as a true SPAC under stock-exchange rules. Instead, Ackman would make the Universal Music transaction with just his hedge fund and look for an entirely new deal for Tontine. PSTH investors, according to one Redditor, felt “left at the altar.” Ackman didn’t offer a lot of reassurance: “Well, if you’re a Tontine shareholder and you wanted this deal, you should call the SEC and complain,” he told CNBC Monday morning. “I guess I would say that would be my first call.”

For the average investors who believed Ackman was on their side — and whom Ackman courted every step of the way, addressing tweets to the Tontards and promoting a literal sock-puppet video making a bullish case for PSTH — it’s a cautionary tale from the trendy world of SPACs. It’s possible that the retail investors who followed Ackman will still do fine over time, and he now has 18 months to complete another deal for Tontine. But “there will always be a stain on its otherwise clean shirt,” says Reece Longwell, who bought a bunch of PSTH stock last fall. Longwell, a college student in Atlanta who considers himself a full-time investor, says his main attraction to the SPAC was that “Ackman’s interests were directly aligned with mine.” That changed, though, when Ackman canceled Tontine’s deal with Universal Music Group and had his hedge fund take over the whole deal instead, which Tontine investors, locked out of the opportunity, interpreted as Ackman seizing the deal for himself. “That does not sit right with me, and it makes me feel like we were, for lack of a better word, robbed,” says Longwell.

At one point, Tontine was, by a wide margin, the most highly valued SPAC on the market, based on how much extra investors were willing to pay for the stock in comparison to the amount of cash raised raised for the mystery acquisition. By mid-February, PSTH stock had surged 65 percent since it first hit the market with Ackman teasing that he hoped to announce a merger deal with a “mature unicorn” — or another private or family-owned company — by the end of March. “Expectations were sky high,” says Julian Klymochko, the CEO and chief investment officer of Accelerate Financial Technologies, a Canadian investment company that runs an ETF specializing in SPACs. “I was under the impression that investors would be disappointed with any deal.”

Even though the March timeline came and went with no news, investors continued to let their target expectations run unchecked. Besides Airbnb and Subway, Ackman let it slip that he’d approached Stripe, currently the most valuable private start-up in the U.S. Investors further speculated that he could be setting his sights on Bloomberg, the financial stalwart founded by the former mayor of New York — a rumor fueled in part by a virtual interview Ackman gave at Fifth Avenue Synagogue, which some thought was designed to impress Mayor Mike.

The short-lived Universal Music Group deal — not a full merger but rather a purchase of a chunk of stock — didn’t live up to those expectations. “When the UMG deal came out, my initial thought was ‘That’s not how this is supposed to go,’” says a Midwest-based retail investor who bought into Ackman’s SPAC soon after it began trading last summer (and who declined to give his real name). Even though some investors, initially skeptical, eventually came to like the transaction, their hopes for making a killing on PSTH have steadily deflated.

In a market that lately almost always goes up, Pershing Square’s Tontine stock has defied the trend by almost always going down. PSTH shares sank 12 percent on the day Ackman confirmed deal talks between Tontine and Universal Music in early June; the stock sank some more when he abandoned the deal. PSTH did not close higher for 21 days in a row this month, and it now trades close to its IPO price of $20 after reaching a high of $33 in February. “Sentiment went from red hot to ice cold in about four months. Back in March, Ackman could do no wrong, and he was going to announce the best deal in history, and now people generally view him as having no hope,” says Klymochko, who didn’t invest in the Tontine SPAC because of its rich valuation but would consider buying if the stock falls further. “They’re not doing their No. 1 deal, but perhaps their second or third choice, so people are fearful that the quality is below UMG — which they weren’t excited about.”
Angry open letters to Ackman on Reddit abound, often signed by “former Tontards.” Ackman doesn’t seem too happy with the Tontards either. In his interview with CNBC, he blamed PSTH’s decline in price largely on the “Reddit community” and “a lot of shorter-term investors” who’d loaded up on stock options, which the hedge-fund manager admitted would likely not have fared well with the particular structure of the Universal Music Group deal. That comment inflamed the situation even more, prompting many PSTH holders to wonder whether Ackman cared about the small-time traders at all. “I wouldn’t even put myself in ‘the Reddit crowd’ camp that you so nicely threw under the bus today,” wrote one Redditor and ex-Tontard under the username SpongeBobSpacPants. “I took a large position in PSTH common [stock] knowing I was getting to invest alongside a great and reputable investor who said he was looking out for the little guy … In essence, I fell for it.”

Meanwhile, Ackman has been stewing about the SEC’s actions. In addition to the multiple big-law firms that had worked on the deal to ensure it passed regulatory muster, Ackman had personally held discussions with the NYSE, which had assured him everything was good to go. The hedge-fund manager was then dumbfounded and dismayed when the SEC chose to block it anyway. While the SEC did not respond to a request for comment, some wonder if the new leadership at the agency may have made an example of Tontine amid a new crackdown on SPACs. That move left Ackman in a corner: Because his agreement with Universal Music Group did not include a way to back out even for regulatory reasons, Pershing Square, the hedge fund, became the best way to get it done — or else risk being sued.

Still, Ackman is vowing to make good on his promises in the next year and half. He plans to find a new, simple merger deal for Tontine. While he’s lost a few months pursuing Universal Music, he has a “running start” toward his next target, he said in the CNBC interview, as some of the companies on his initial shortlist are still available (say, Stripe) and might now be ready to go public. “I wouldn’t necessarily sell Bill Ackman short,” says Klymochko. Meanwhile, Tontards can still buy the music company’s stock when it starts trading on the public markets in two months — they might even prefer it that way, Ackman said, because they’ll be able to trade the stock themselves as opposed to its being locked up in the SPAC. Ackman just can’t guarantee that they’ll be able to get it at as good a price as he paid. “Perhaps everyone ends up being happier,” he told CNBC optimistically. For now, that prospect is a long way off.

The Not-So-Happy Story of the World’s Biggest SPAC