Is this the worst deal of the SPAC era?

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The abysmal performance of companies that have gone public by merging with special purpose acquisition companies has emboldened the US Securities and Exchange Commission to tighten investor protections and disclosure requirements.

SPACs were touted as a shortcut to going public and a way for retail investors to gain access to promising startups. But hype and haste have often sidetracked due diligence and financial controls. The promise has given way to losses and, in some cases, lawsuits. An index of 25 companies that went public by combining with a SPAC has plunged more than 75% from its peak in February last year.

When financial historians need a representative model of the rise and fall of SPAC (echoing in the dotcom era), they’ll be spoiled for choice, but they may end up nominating View Inc.

The disastrous $1.6 billion merger of the “smart window” maker with a Cantor Fitzgerald-backed SPAC illustrates why reforms have been long overdue. Already reeling from an accounting scandal that erupted within months of the closing of the SPAC deal in March 2021, View warned last week that it risked running out of cash. The stock extended its slide to 93%, making it SPAC’s second-worst-performing large deal in the past two-and-a-half years. (1) The cast of institutions involved with the company and its ill-fated blank check transaction (Cantor, Goldman Sachs Group Inc., Softbank Group Corp., Credit Suisse Group AG and now-insolvent Greensill Capital) reads like a game. bubble bingo game.

In short, View manufactures glass panels with an electrically charged coating that automatically tints when the sun shines, eliminating the need for blinds.

The Silicon Valley-based company has racked up about $2 billion in losses since its inception more than a decade ago, and it has negative gross margins — a fancy way of saying its smart windows cost more to build than they sell.

However, the SPAC delivered $815 million in gross receipts and, in November 2020, confidently predicted that View would not require “additional equity capital” before achieving positive free cash flow. However, View said last week that its ability to remain a going concern was in “substantial doubt” because its $200 million in cash won’t last another 12 months. Oh!

And since View hasn’t filed earnings reports since May 2021, it risks having its shares delisted from Nasdaq later this month. The pause stems from View’s August disclosure of accounting irregularities related to anticipated repair costs. Inaccurate collateral buildups forced the resignation of its chief financial officer in November. The most realistic estimate of liability far exceeded the company’s modest annual sales. “Discovering a problem with the operation of our finance and accounting organization is painful,” View CEO Rao Mulpuri wrote in a letter to employees in November, adding that he took “full ownership” of the issues.

The warranty review is complete and no further material errors have been identified. However, despite assurances of “substantial progress”, the company has not yet published the restated accounts for 2019 and 2020, nor the accounts for the last four quarters. Oops again. View did not respond to requests for comment.

After investing over $200 million in the SPAC transaction, Singapore’s sovereign wealth fund GIC must be furious. Retail investors who stockpiled stocks are also licking their wounds. Not surprisingly, some have filed a class action lawsuit.

Others only have themselves to blame. The SoftBank Vision Fund pumped $1.1 billion into the company in 2018, one of a long line of ill-advised investments in capital-intensive real estate companies (you’ll recall WeWork Inc. and Katerra Inc., which also imploded). SoftBank remains View’s largest shareholder, with a 30.5% stake.

Interestingly enough, a large portion of SPAC’s proceeds clearly went to pay off a $250 million high-interest line of credit provided by another troubled SoftBank investment, Greensill Capital. The loan provider is not identified in the SPAC prospectus, but the size is similar to the exposure reported in January 2021 by a Credit Suisse Group AG supply chain fund for which Greensill obtained assets. The loan was paid off the same month Greensill filed for bankruptcy. The Swiss bank can count itself lucky, as other risky Greensill loans have proven much harder to recover.

Another portion of the SPAC cash went toward $44 million in fees for the banks and law firms that worked on the deal. Goldman Sachs served as View’s merger adviser and helped recruit investors for a separate $440 million money pool that backed the SPAC transaction. Meanwhile, Cantor Fitzgerald’s bankers were brought in to advise their own SPAC, an unfortunately common conflict of interest in SPAC-land. (Cantor’s CF Acquisition Corp II is one of at least eight SPACs he has created. Cantor ranked third last year on the Bloomberg SPAC advisory league table, behind Citigroup Inc. and Goldman.)

To be fair, Cantor disclosed the potential conflict, and the SPAC deal closed at a lower valuation than SoftBank attributed to View in 2018. Cantor also had more stake than most SPAC founders, at least initially. Receiving a third of his free sponsor shares (once worth $125 million but now almost worthless) was contingent on him hitting share price targets that are now likely unattainable. And some of his advisory fees were paid in stock rather than cash. Cantor also invested an additional $50 million in the transaction. It’s unclear if Cantor still owns that many View shares. A presentation by Cantor this week reported that he owned just 8 million View shares at the end of March, a reduction of more than 50%. He declined to comment.

Like most SPACs, he did not get an independent, unbiased opinion on the value of the deal. That’s something the SEC’s proposed rules would effectively require in future SPAC transactions, in addition to forcing banks that underwrite SPAC IPOs to bear legal responsibility for the information in the prospectus, including financial projections.

It’s also a shame there was no independent underwriter in this case, as the quality of Cantor SPAC’s preparation is being questioned by disgruntled investors who went to court in February to demand that it hand over information about its due diligence.

The chances of View turning profitable quickly seem slim, so it should try to raise capital in a market that has suddenly turned very sour with cash-burning tech companies.

Their plight highlights why companies need to have strong financial controls in place before going public and why we need fully accountable gatekeepers for SPAC disclosures. The SEC reforms come too late for View investors, but they may help prevent another such blowout.

More from the writers of Bloomberg Opinion:

You cannot bank at SPAC. Thanks, Gary Gensler!: Chris Bryant

The SEC is coming for the SPACs: Matt Levine

SoftBank’s son has survived bigger disasters: Gearoid Reidy

(1) My benchmark for a “large” SPAC deal was an enterprise value greater than $1 billion.

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Chris Bryant is a columnist for Bloomberg Opinion who covers industrial companies in Europe. Previously, he was a reporter for the Financial Times.

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