Evaluating SPAC, still...

CLIQ has released is audited financial statement for the year ended 31 March 2013. 

Since a SPAC, before the qualifying acquisition, is simply a shell company with a lot of cash, evaluating it using the common business valuation for a going concern company might not be suitable. It does not have the revenue or profit for us to do a relative valuation. It does not have a ready business to conduct a DCF analysis on.

But I was telling myself, there must be a way I could at least tell these SPACs apart. I must be able to make a judgement call to help me decide what to do. Otherwise I would be gambling and I would not want to do that. It got me thinking, how do I evaluate a SPAC before its qualifying acquisition?

We would have normally invested in a SPAC based on two main factors. The first one is the state of the industry the SPAC is in. We must have thought the industry was robust and full of lucrative opportunities. The second fact would be the management/promoter. We must have had the belief that the management was competent to grab the opportunity that was present in the industry, transforming that opportunity into a business that will give me returns (in terms of dividends and/or capital appreciation) that will make us rich..oops... return that will be commensurate with our risk of faith in the management.

I cannot do anything about the industry so I guess I have to assess the management.

So how can I go about doing this?

I firmly believe that the management (who received 'free' stake in the SPAC) or promoter must behave as an entrepreneur rather than a typical salary drawing professional. These people already received their 'return' in the form of heavily discounted / free shares in the company for their part, regardless of it being under moratorium. As a management entrepreneur, we would expect the salary to be enough to maintain a decent lifestyle while waiting for the acquisition to bear fruit. Making a killing on the salary seems to me to be simply greedy and that is bad entrepreneurship.

The next is cash management or expense management. While it is understood that the SPAC has to set aside 90% of the cash proceeds (which I am hoping the regulators to push for 100%, applied retrospectively), it does not mean that the 10% is 'given up' to the management and promoters. A good entrepreneur would hold 100% of the proceeds with great care and prudence. A good entrepreneur should not treat the 10% as a kind of grant. Unfortunately, I could not find a section in the financial statement that talks directly on the utilisation of the 10% of the proceeds, despite its considerable amount, which left me having to read between the lines a bit.

The most glaring information would be the amount spent on looking for the qualifying acquisition. CLIQ reported that for 2014, it had spent about RM6 million on looking for the qualifying acquisition. It that too much or too little? No one knows except for the management of the company. What we can do though is compare the similar expense made by another company and for this purpose we can look at Hibiscus. Hibiscus, in 2012, had spent about RM5.7 million for the qualifying acquisition. Based on this it does not look too bad, except that Hibiscus had included the acquisition of LIME in the FYE 2012 accounts. Therefore IF the amount stated in Hibiscus' account included the all the costs to complete the LIME acquisition, then in my view, Hibiscus was better at managing the cost then.

Although I agree that SPAC is akin to a private equity and private equity ventures are famous for being secretive, but by choosing to take the public's money via an IPO it is also a public entity. The disclosure expectation of a public entity is much higher than a private entity, and in this respect I am sorely disappointed on how little SPACs reports on their expenses management compared to an operating company (well, since they do not have an operation to account for I guess they could spend more time on this compared to others). Sigh.

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At the time of writing this article i owned shares in CLIQ (though i bought solely based on the cash value of CLIQ and one clause in the prospectus that stated, roughly, that they have to return the cash proportionately to the dissenting investors when calling for a vote on the qualifying acquisition.)