There is quite a bit about special-purpose acquisition companies, or SPACs, that is not well understood by many investors. And this is especially true when it comes to SPAC warrants. In this Fool Live video clip, recorded on Aug. 9, 2021, Fool.com contributor and Certified Financial Planner Matt Frankel discusses what investors should know about these complex financial instruments.
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Matt Frankel: Mike says, "I bought the SPAC for Cyxtera (NASDAQ: CYXT) before the merger, now I have stock and warrants. Can you clarify how, when, if I should exercise the warrants?"
Great question. Cyxtera, if you're not familiar with, ticker symbol I believe is CYXT, they just completed their SPAC merger. They were the company that came from Starboard Value Acquisition, Starboard Value Funds SPAC. Once the SPAC merger is finalized, even if you just held the units before the merger, you'll now find some stock and warrants in your portfolio. For Cyxtera, I believe it was a one-to-six distribution rate. For every six shares you owned, you got one warrant. But this is a general SPAC question.
Generally, SPAC warrants are good for five years from when the business combination is complete. A five-year clock just started. The exercise prices are $11.50. That means for every one warrant of Cyxtera you have, you have the right to buy one share at $11.50 anytime within the next five years. However, there are some circumstances where SPAC warrants can be forced to be exercised early. The general rule is that if the stock is trading for $18 or more for a period of 30 days, the company can redeem those warrants for essentially nothing. Meaning that you have a short window of time to exercise them or sell them before they are redeemed or cease to exist. The company is required to give you at least 30 days notice to do that. The other is, if the stock is trading from between, I believe $10 and $18 it's a standard, they can do what's called a cashless exercise, where the warrant will convert to stock at a ratio that you could find in the S-1 prospectus that was filed when the SPAC went public. In either event, you have to have 30 days of notice before that can happen.
The best answer I can give you as to how, when you should exercise those, is keep watching the news, make sure you have news alerts set for Cyxtera, which is an important thing to do for any SPAC that you might have warrants in. Because the last thing you want is for the company to announce that it is going to redeem those warrants, which means cancel them effectively. You get something like a cent for each warrant if you choose to have them redeemed while they're still in your account. The last thing you want is for those warrants to be redeemed without you knowing, and then you're left with nothing, which is a very real possibility if you're not keeping tabs on the news. With any SPAC warrants you have, make sure you have news alerts set for that company, because like I said, they are required to let you know that there are about to redeem the warrants a little bit before they actually do, 30 days. That gives you ample time to decide whether you want to exercise them or whether you want to sell them or whatever.
If you're not comfortable with that, I'd get rid of the warrants, is the best advice I can give you. If you're not comfortable with keeping track of the company's news alerts, making sure that you don't get blindsided by a forced redemption of warrants, then I would make sure you get rid of the warrants and just focus on owning the stock. SPACs generally do force redemption of their warrants if they're trading for a high price. You won't find DraftKings warrants still on the market right now, or Virgin Galactic warrants because those have all been long since redeemed because the price went up so much. The warrants have a five-year time limit, but there's a big asterisk with that.
Matthew Frankel, CFP owns shares of Cyxtera Technologies, Inc. The Motley Fool owns shares of and recommends Cyxtera Technologies, Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
