When the opening bell rang at the NYSE a few weeks ago, founder and CEO of Hyliion Inc. Thomas Healy earned the dubious distinction of becoming one of the world’s youngest self-made billionaires. With a stake in Hyliion Holdings Corp. — the newly formed company from the merger with special purpose acquisition (SPAC) vehicle Tortoise Acquisition — worth more than $1.4bn USD, the lucrative deal is representative of the growing activity from SPACs and the huge inflows that investors are pouring into increasingly risky ventures. Futuristic vehicles, car tech, and electric vehicles are the latest target of SPACs in a year which has seen a substantial uptick in the number of reverse acquisitions taking place. Amidst the glum backdrop of a global pandemic, companies such as Hyliion and Nikola have hugely benefited from SPAC listings which offer a way to take a company public without the traditional risks and complexity of a typical IPO. With increased popularity, however, comes greater scrutiny, and not entirely without reason.
All aboard the EV hype train
It is no secret that electric vehicles have become the talk of the town. Billions of dollars in investments have been poured into the production of electric vehicles and their batteries this year, with Blackrock, the world’s largest fund manager overseeing $7.8trn in assets, joining the fray by investing $118m in electric vehicle startup Arrival Ltd. Now considered almost household names amongst retail investors, carmakers Tesla and China-based Nio have seen 435% and 606% increases in their YTD share price.
SPACs have taken note, and no more than six companies have announced a reverse merger listing already this year. In August, Luminar announced plans to list at a value just over $3bn with Gores Metropoulos, a SPAC, and earlier this year the controversial electric semi-truck company Nikola went public at a similar valuation with VectorIQ Acquisition Corp. The latest to join the fray is Hyliion, a company focused on breaking into the hybrid electric semi-truck industry through it’s electrified powertrain solutions which can be retrofitted onto existing fleets. Its solutions promise to leverage proprietary battery systems, control software, and data analytics alongside fully integrated electric motors and power electronics, in order to deliver a powertrain system that can either augment or fully replace existing truck fleets while reducing the total cost of ownership. This has helped set it apart from the competition by allowing it to offer hybrid solutions, contrasting with Nikola and Tesla who have focused entirely on emission-free vehicles.
No free lunch
Hyliion Inc. was founded by Thomas Healy in 2015 and even the founder himself has admitted that a degree of luck was involved in the deal-making process. In a financing round during the first quarter, the decision to go public via a SPAC process was chosen in favour of the conventional route due to the disadvantages that follow the slightly convoluted and drawn-out nature of an IPO. Ahead of a shareholder vote a month before the merger, shares in Tortoise (the SPAC merging with Hyliion Inc.) surged more than 300%. Peaking at around $60 a share, this gave Hyliion a market capitalisation of nearly $10bn— a considerable amount for a company with just over $1m in revenue and a handful of customers.
There is certainly reason for the hype, given the company’s promising performance metrics comfortably outpacing rivals in the market and a growth roadmap that barely even scratches the surface of an $800bn global trucking market. Hyliion is forecasting total revenue of $344m in 2022, $1.019bn in 2023, and $2.091bn in 2024. Earnings before taxes, interest, depreciation and amortization are expected to grow from $8m in 2022 to $602m by 2024.
Yet it leaves one to wonder if this remarkable rally of its share price is emblematic of the reckless behaviour and momentum trading where the greater fool theory is most apparent, stemming in part from the large influx of retail investors, as well as the growing interest in SPACs from established players.
Since its listing, HYLN share prices have shed more than half its value. Market turmoil and internal conflict surrounding the terms of the merger, just before the listing sent it into a downward spiral. In hindsight, it is always easy to state that a correction was overdue following its meteoric rise, but at the time of the merger it was overwhelmingly assumed by investors that the only way for the share price to go was up.
Nikola has also suffered a fall from grace after damning reports from short-sellers and repeated PR blunders from its former CEO, Trevor Milton, who has now stepped down. Numerous accusations of faking videos and fraudulent claims have hammered it’s stock price, with the SEC now investigating the company for fraud allegations. To make matters worse, a tentative partnership agreement with General Motors is now on the brink of falling apart after the recent spate of controversies. NKLA is now trading at just under $20, nowhere near its intraday all-time-high peak of $90 earlier this year.
A shadow of doubt
Comparing Hyliion to Nikola directly would be unfair — the former has a credible founder at its head, with a tangible and existing product, while the latter has shown little more than doctored videos and CGI. Yet they both serve as prime examples of how the boom in retail investment during the COVID-19 pandemic has overhauled the fundamental principles and trading dynamics behind SPAC vehicles. SPACs have always been inherently risky investments due to the lack of scrutiny and transparency that a typical IPO process usually offers, and without proper due diligence being performed, SPAC valuations are being pushed higher than usual, regardless of their core business or trustworthiness.
While companies in the electric vehicle industry with ongoing SPAC deals — Velodyne Lidar, Luminar, and Fisker, to name a few — are all trading above the standard $10 SPAC price, the question of whether they can execute on their promises remains to be seen. Indeed SPACs were often regarded as alternative investments, seeking out companies or ventures with untapped potential. With the surge of SPAC acquisitions so far in 2020 alone, it would seem that they have no qualms settling for speculative companies and essentially placing bets that the promised technological advancements will be delivered within a reasonable timeframe — despite hardly any existing revenue and lukewarm projections.
A report from Goldman Sachs reveals that while SPACs perform well when raising capital, it is often the case that they struggle to outperform the wider market once a merger has taken place. Of over fifty SPAC transactions analysed in the report, the newly public companies mostly lagged behind the S&P 500 and Russell 2000, with significant variations in returns.
When viewed in this light, one cannot help but wonder if this fervour surrounding the electric vehicle market is but an outlet for investor exuberance and an increased appetite for risk-taking without the appropriate due diligence. All the companies discussed above have grand plans for the future, with visionary leaders at the helm. In some cases, these visions are entirely fraudulent ones, though the market remains enraptured nonetheless.
The road to a breakthrough in untested waters is not an easy one. Take Tesla for example; having posted four straight quarters of profits after close to a decade filled with uncertainty and mixed success. Production issues and delivery complications are only some of the difficulties it faced when marketing its new electric cars. It would be prudent to keep a close eye on these up-and-coming companies formed as a result of reverse mergers as they try to reinvent the future of mobility.