SPACs Are Not a Business Model

Beware the latest financial craze as some sort of salvation for news businesses.

Welcome to Second Rough Draft, a newsletter about journalism in our time, how it (especially its business) is evolving, and the challenges it faces.

After 14 years working in nonprofit news, I have heard both frivolous and cogent critiques of the field[1]. One of the cogent ones is that “nonprofit is not a business model.” By this critics mean that operating as a nonprofit is no substitute for running a business as a business, making sure that revenues at least match expenses, that revenues and growth are sustainable, that an organization is attracting and retaining talent, that products and services are of value to consumers and users. Just being a nonprofit does precisely nothing to ensure any of these outcomes, and operators ignore this reality at their peril. The nonprofit news graveyard is littered with examples.

An analogous delusion seems now to be attaching to one of latest crazes on Wall Street. The craze is for what proponents like to call “SPACs”, an acronym for Special Purpose Acquisition Companies.[2] These are shell public companies, formed and floated on a stock exchange by Wall Street speculators (frequently joined by celebrity frontpeople ranging from Paul Ryan to a Who’s Who of sports stars), that seek out operating firms and merge with them, enabling an operating company to go public more quickly, more surely and with less scrutiny than would otherwise be possible.

Along the way, as so often is the case with faddish financial techniques, the only people who make sure returns are the financial professionals. It’s yet one more case where, in the Wall Street casino, the “house” always wins. Oh, and it’s been clear for months that the odds for regular investors aren’t great.

Yet, the SPAC craze is in full bloom. The rate of their creation, measured in dollars capitalized, is running about twice that for traditional initial public offerings. Among the companies using a SPAC have been space travel concern Virgin Galactic, the sports betting company DraftKings, the DNA testing firm 23andme, the trading card company Topps and the scandal-plagued WeWork and Nikola, the latter of which would like you to think it bears more than a common-namesake resemblance to Tesla.

In the news business, the companies exploring SPAC deals now reportedly include the Athletic, Axios, BuzzFeed (parent now also of HuffPost), Group Nine Media (publisher of NowThis, PopSugar and Thrillist), Patch and Vice.

Proponents of SPACs will tell you that companies such as these may find the technique attractive because it will give them access to the capital of the public company markets, capital they might not otherwise be able to attract. But here’s the thing: access to capital for promising businesses is actually fairly easy these days. Interest rates are historically low, money is loose, the system is awash in it, in significant part because both the monetary policy of the Federal Reserve and the fiscal policy of the executive and legislative branches are trying to goose the economy in the wake of the pandemic. And the economy, by all measures, seems to be rebounding.

Unlike a year ago, if you can’t readily borrow money these days, it may be a strong hint that you shouldn’t be trying—that is, that you may have trouble paying it back, or at least that the people who are sitting on the money think you might.

Sure, the capital may fuel acquisitions, but is there really any evidence that the sort of minimal “scale” that comes from combining these relatively small companies will make them better able to compete for advertising with Facebook, Google and Amazon? Definitely not. Alternatively, is there evidence that the same sort of scale will facilitate selling subscriptions to a disparate group of “bundled” products, for instance combining politics and sports journalism? If so, no one that I know of has seen it. On the other hand, will going public through a SPAC result in a big payday for top executives as well as the Wall Street folks who convince them to do it? You bet.

So when you start to see some of these digital news providers, with great fanfare, celebrating possible consolidation and their stock exchange debuts via SPACs, rather than joining in the champagne toasts you may want to begin laying in supplies for managing the hangover ahead.

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[1] Among the frivolous critiques is that the need for donations is somehow more corrupting than other ways of obtaining revenues to support journalism. Dependence on any revenue stream, to be sure, has the potential for conflict of interest. But that is just as true of advertising as it is of donations. Even financial dependence on readers poses risks to editorial independence of which I think we need to be increasingly conscious.

[2]You have to admire the re-branding of calling these things “SPACs,” which sounds at once complicated and antiseptic. In an earlier, even shadier incarnation they were known as “blind pools,” which is much more descriptive. Lately, the Wall Street Journal (my professional home for 15 years), among others, has taken to calling them “blank check companies,” although the SEC says that SPACs are only one particular type of blank check companies.