The model of deploying other people's money is a recipe for wasting resources
At the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting this weekend, Warren Buffett (Trades, Portfolio) explained how growing competition among SPAC funds for deals would lead to the industry's demise.
“It's a killer. The SPACs generally have to spend their money in two years, as I understand it. If you put a gun to my head to buy a business in two years, I'd buy one,” Buffett said. “There's always pressure from private equity funds.”
Special purpose acquisition companies, or blank-check companies, have grown in popularity on wall street in times of easy money. SPAC deals finalized in the 2019-20 period jumped 400%, according to Dealogic.
“That won't go on forever, but it's where the money is now, and Wall Street goes where the money is,” Buffett said. “SPACs have been working for a while, and if you secure a famous name on it you could sell almost anything.”
Buying a business in a rush isn't the only thing that is wrong with SPACs. The whole model of raising acquisition funds without having a clear vision of what you want to buy and why you want to buy is in sharp contrast with the traditional acquisition process, as explained by Buffett in his 2020 annual letter to shareholders:
“Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company's durable strengths, the capabilities, and the character of its management, and priceIf that strategy requires little or no effort on our part, so much better.”
In short, the SPAC model of deploying other people's money is a recipe for wasting resources: buying the wrong company at the wrong time and for the wrong price.
Wall Street is littered with examples of such acquisitions.
Source: gurufocus – Buffett Explains Why SPAC Mania Won't Go on Forever