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Almost 260 special-purpose acquisition companies (SPACs) have amassed $87 billion they must invest by a deadline that is becoming harder to meet, according to data firm SPAC Research.
A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital, the SPAC buys and merges with a promising company that is not ready to go public.
After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.
Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public are banned from doing.
Under the rules of the U.S. Securities and Exchange Commission, a SPAC must invest the capital it has amassed within two years of its creation. If it fails to do so, the SPAC must return its investors’ money.
SPACs flooded the U.S. stock market last year and this year, raising a record $105 billion in 2021 alone, SPAC Research has reported.
The problem: the number of companies worth buying has dwindled, largely snapped up by earlier SPACs, while SPACs themselves remain plentiful – apparently too plentiful.
SPACs have lost their mojo, as we have reported (see our 25 May article, “GAMBLERS DUMP SPACs”), with several companies that came public through SPACs failing to live up to their promise. Share prices for Joby Aviation, a flying-taxi venture; electric-vehicle battery company Microvast; and 23andMe, the genetic testing business, have fallen 30 percent or more since January.
Just two of 23 SPACs that announced deals last month are now trading above their initial offering price, according to SPAC Research.
With fewer investors showing interest, SPACs now have a harder time buying those relatively few remaining companies worth acquiring.
The dearth of prospects has led SPACs increasingly to bid against each other for worthy takeover targets, a contest some observers have called a “SPAC-off,” according to the Wall Street Journal.
The 260 companies cited by SPAC Research face deadlines in early 2023.
“There is an awful lot of capital sitting there that has to find a home,” John Chachas, co-managing principal at Methuselah Advisors, said to the WSJ.
“You’re going to see a fair number of less-than-desirable deals done just because they have to get done,” he said.
Also, SPACs’ spectacular, relatively sudden success has caused regulators to make public statements about looking into SPACs’ financial records. That has made many potential investors skittish.
Companies eyeing mergers with a SPAC should build themselves up over the next year, then wait for SPACs to approach them when the blank-check companies are desperate and more willing to entertain terms favorable to the companies, Chachas advised.
TRENDPOST: A strengthening economy could buoy the market for SPACs. A few deals that deliver near-term returns for their investors could reinflate the market with another case of SPAC fever.
TREND FORECAST: In our 4 May article, “IPOs SET RECORD PACE,” we noted that SPACs were among the factors artificially inflating market values. We renew our forecast for a major market correction, with SPACs and their related companies being hit among the hardest. Indeed, the SPAC mania is reminiscent of the dot.com days when billions were invested in hi-tech companies that created nothing and made no financial or common sense.