SPAC Backed by Father Gains 84% Buying Firm Run by Daughter

(Bloomberg) -- Jay Sidhu spent two years looking for the perfect company to buy with his blank-check company Megalith.

After coming up empty, he finally settled on BM Technologies, which he had co-founded and also happened to be run by his daughter Luvleen.

In January, after merging with Megalith, BM Technologies began trading on the New York Stock Exchange and the digital-banking firm touted Luvleen, as “likely the youngest female founder and CEO” to take a company public.

“This is really an opportunity to celebrate,” Luvleen Sidhu, a 35-year old with degrees from Harvard and Wharton, said in an interview. “Megalith was established in such a rigorous process to look at the best fintech companies to invest in and eventually our paths crossed.”

Sidhu said the firms, including Megalith -- whose chief executive officer was her brother Sam -- took “rigorous and appropriate action” to address any perceived conflict of interest. Those actions included the companies appointing independent boards of directors with their own counsel and financial advisers to review the $140 million deal, which received unanimous approval, she said.

What’s more, father and son gave up shares to remove any appearance of conflict, and the family members’ overlapping interests were disclosed in a press release and filings.

But according to Marianne Jennings, a professor of legal and ethical studies in business at the W.P. Carey School of Business at Arizona State University, such acknowledgments aren’t enough.

“It doesn’t matter how much you disclose,” she said. “What you have here are conflicts that are unmanageable. Everybody’s on both sides of the deal, no matter where you look.”

The Megalith deal is just one of hundreds of transactions struck in the past two years by SPACs, or special purpose acquisition companies, which have gone from a niche corner of finance to the latest must-have accessory for investment bankers, corporate executives, retired sports stars and former politicians.

Six hundred and eighty-four SPACs with a combined value of $196 billion have gone public since the beginning of last year, according to Bloomberg data. The mania has put pressure on the Securities and Exchange Commission, which has said it wants to apply greater scrutiny to ensure investors are protected. One of its top concerns is being vigilant about disclosures, according to a statement in April. The SEC didn’t respond to a request for comment.

Enthusiasm for SPACs has dropped sharply since February and some high-profile deals have soured, including the October merger of SPAC DiamondPeak Holdings and Lordstown Motors Corp., whose stock has halved this year amid a cash crunch and questions over its technology and disclosures.

But there’s still an avalanche of money sloshing around the system, with SPAC sponsors looking to raise money or spend the cash they’ve collected.

Chamath Palihapitiya, frequently referred to as the King of SPACs, recently filed to raise four more. That came after Bill Ackman’s blank-check company said it’s in talks to buy 10% of Universal Music Group from Vivendi SE in a deal that would value the record company at about $42 billion, including debt.

SPACs by design incentivize speedy dealmaking. Companies that go public through a SPAC merger skip the rigors of an IPO roadshow -- where issues like conflicts or competitive threats might draw scrutiny -- and get swifter access to cash than they would with a traditional share offering.

SPAC founders, or sponsors, get a potentially large windfall in the form of shares in the target company for relatively little investment. Retail investors in the SPAC, meanwhile, get a chance to get in early on a stock they are betting will soar. Still, it’s an increasingly risky bet.

Of the 93 SPACs that completed a takeover between January 2020 and the end of this April, the equally-weighted average return from the day before the ticker symbol changed through May 24 was negative 4%, excluding returns on outstanding warrants, according to an analysis by University of Florida researchers Jay Ritter and Minmo Gahng. The IPOX SPAC Index has fallen by nearly a quarter since its February high.

BM Technologies, which operates a digital-banking platform best known for processing student loan refunds on behalf of colleges, was bought by Megalith at an enterprise value of $140 million in August.

As with many SPACs, the deal rewarded its founders or sponsors -- a group of 11 headed by Jay Sidhu. The sponsor owned 719,802 shares of BM Technologies as of late March, filings show.

Those shares are now valued at $9.3 million -- a 14% return on the sponsor’s initial investment, excluding warrants. Including warrants, their investment has returned 84%. Luvleen’s 6.6% stake in the business is worth $10.5 million, according to Bloomberg data. The stock fell 2.8% to $12.61 at 1:40 p.m. on Friday in New York.

Three of Megalith’s early institutional shareholders, Goldman Sachs Group Inc., Millennium Management and Gabelli Funds, who together owned 15.5% of the company, sold their positions a month after the merger for a return of 30% to 50%. A retail investor who bought the day of the merger, meanwhile, would be down 7%.

Luvleen Sidhu and A.J. Dunklau, who took over as Megalith’s CEO from Sam Sidhu, said in a statement that “we don’t think you will find any SPAC with better alignment” of interests between the sponsor and shareholders.

The sponsor forfeited an “incredibly high” 83% of their initial stake, or promote, they said, and the stock is up more than 25% since the deal was announced.

A spokeswoman added that any sponsor member with any potential perceived conflict forfeited their sponsor shares, giving up stock now valued at $38 million.

The Sidhus did benefit through a bank they own a stake in.

BM Technologies, or BankMobile as it was originally called, was incubated at Customers Bancorp Inc., a Pennsylvania lender that Jay heads. His son Sam Sidhu will become CEO of its main subsidiary, Customers Bank, next month. Customers received $27 million of the purchase price and the bank’s share price jumped 19% the week of the merger.

Luvleen originally joined Customers after stints as an analyst at Neuberger Berman and Lehman Brothers shortly before its collapse. She and her father founded BankMobile as a strategic initiative of Customers in 2015 and built it primarily through acquisitions. The bank paid $42 million in 2016 for the refund-management business of Higher One, a financial-services firm aimed at college students that had run into trouble for deceptive marketing. They hired hundreds of their staff and rebranded Higher One’s main product as BankMobile.

She said the past few years were a “circuitous journey” as she tried to raise capital and “have the market respect and understand and see what we were trying to build.” She said Megalith had considered buying it in 2019, but “we weren’t each others’ top priorities” at the time.

The intertwined nature of the Megalith deal does little though to help the perception of SPACs, according to Kara Tan Bhala, founder of Seven Pillars Institute, a financial-ethics think tank.

“The benefits are disproportionately given to sponsors and IPO investors,” she said. “There’s a basic unfairness.”

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