Wall Street Is Churning Out SPACs at Investors’ Peril

Would you bet on the long-term success of a hasty marriage in Vegas?

That’s how Usha Rodrigues, a professor of corporate finance at the University of Georgia, sizes up the spree of mergers carried out by special purpose acquisition companies over the past few years. A flood of SPACs have been whisking private businesses onto U.S. stock markets, avoiding more traditional initial public offerings that, like old-fashioned weddings, take months of forethought, planning and anticipation. Either process creates a “lawfully wedded couple,” Rodrigues quips. But one might not thrive for long.

A growing mountain of evidence shows such skepticism is right — and that enthusiasm for SPAC deals often fades within weeks or months. Bloomberg dug into market data and regulatory filings in an analysis of more than 190 SPAC mergers that have launched private companies onto public markets since early 2019. Among the findings: They tend to significantly underperform typical IPOs.

A Better Way to Go Public?

SPACs have fared worse than traditional IPOs since 2018
Note: Price changes are through Nov. 10. Includes U.S.-listed SPACs tracked by Bloomberg that went public in 2018 or later and completed a merger by Oct. 29, 2021. IPO data excludes SPACs and is for U.S.-listed firms that were still trading as of Nov. 10 and raised more than $50 million.
Source: Bloomberg

SPACs that went on to merge with companies are up, on average, 11% since their own initial stock listings. But that’s a charitable way of looking at them. From the date that the mergers took place, those stocks have fallen an average of 9.9%.

SPAC boosters might argue that such a comparison is unfair because few retail investors can buy into IPOs at the offer price, missing out on the so-called “IPO pop.” Still, the median price change for SPACs — a 6% drop — underscores that while some do soar, most don’t. An index of 25 companies that became public as the result of combining with a SPAC had also under-performed the S&P 500 Index by more than 50 percentage points this year through last  week.

Yet for some investors the allure remains — reaching new levels of hype and spectacle just weeks ago when former President Donald Trump announced a plan to launch a new media company and merge it with a SPAC. That SPAC’s stock jumped more than 1,600% in less than two days—long before Trump’s app was even available for download.

There’s a certain amount of risk in turning private ventures into publicly traded companies. But critics say the problem is that SPAC targets often aren’t ready. And without the detailed regulatory disclosures and due diligence required in normal IPOs, it’s too hard to weed out the duds.

The lackluster track record of SPAC mergers is eroding enthusiasm among early shareholders to stick around. Those investors have two ways of weighing in: They can vote to approve transactions, and they keep their money in. But academic research shows shareholders are often a “rubber stamp” for deals and, increasingly, they’re cashing out their stakes, depriving SPACs of money at the moment they need it.

That’s hardly a vote of confidence in the merger’s long-term prospects.

Backing Out

More SPAC investors are asking for their money back at the time of merger
Source: Bloomberg analysis of spacresearch.com data

Investment banks make money at just about every turn of the SPAC life cycle. They reap fees while helping SPACs sell shares to the public, collect another round by providing advice on mergers, and yet another by finding additional investors to top up SPACs’ war chests to complete deals.

That last funding grab is called a private investment in public equity, or PIPE. Bankers reach out to their clients — usually institutions or wealthy investors — and offer them additional shares, typically at a discount.

Bloomberg sifted regulatory filings and press releases to create a list of more than 160 deals in which SPACs identified banks serving as placement agents, then tracked the stocks’ performance in the weeks and months after mergers completed. The results show that having professional investors coming into the deals is hardly a bellwether of success, though at least those buyers may be OK if they jump in well below market prices. (The chart shows banks whose names appeared most often in those deals.)

PIPE Dreams

Banks are fueling SPAC deals by lining up investors in so-called PIPEs
Note: Price changes were calculated from the closing value on the merger completion date through October 2021. Lines have been simplified to show the overall change, rather than day-to-day fluctuations. Data may not reflect all PIPEs that a bank has worked on.
Source: Bloomberg analysis of SEC filings, press releases

Redemptions can erode returns for early SPAC shareholders who stick around. They end up bearing a greater share of the SPAC’s expenses, said Michael Klausner, a professor of business and law at Stanford University who’s written about the hidden cost of blank-check companies. Those include the fees paid to banks, as well as “the promote,” the loads of free stock that go to the sponsors.

“The SPACs are a pile of money that the banks can’t resist,” Klausner said. The variety of fees “is a really good deal for the banks,” he said. “Which means a really bad deal for the shareholders.”

Remember when every new line of whisky, tequila and vodka seemed to have a celebrity name behind it? SPACs might seem arcane, but there are now so many actors, musicians, athletes and politicians piling in to pitch them that the blank-check companies may surpass that earlier fad. In fact, some celebs have now done both.

It’s prevalent enough that the Securities and Exchange Commission issued an investor alert this year, warning—improbably—against the dangers of “Celebrity Involvement with SPACs.”

“It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it,” the agency wrote. “Investing in one may not be a good idea for you.”

Involved in a SPAC

Involved in an alcohol brand

Justin

Timberlake

Donald Trump

Billy

Beane

Shaquille

O’Neal

A-Rod

Colin

Kaepernick

Kendall

Jenner

Jay-Z

Larry

Kudlow

Sammy

Hagar

Dwayne

“The Rock”

Johnson

Ciara

Serena

Williams

Snoop

Dogg

Involved in a SPAC

Involved in an alcohol brand

Justin

Timberlake

Donald Trump

Billy

Beane

Shaquille

O’Neal

Colin

Kaepernick

A-Rod

Kendall

Jenner

Jay-Z

Larry

Kudlow

Dwayne

“The Rock”

Johnson

Sammy

Hagar

Ciara

Serena

Williams

Snoop

Dogg

Involved in an alcohol brand

Dwayne

“The Rock”

Johnson

Kendall

Jenner

Justin

Timberlake

Snoop Dogg

A-Rod

Shaquille

O’Neal

Donald

Trump

Sammy

Hagar

Jay-Z

Ciara

Billy

Beane

Serena

Williams

Colin

Kaepernick

Larry

Kudlow

Involved in a SPAC

Involved in an alcohol brand

Dwayne

“The Rock”

Johnson

Kendall

Jenner

Justin

Timberlake

Snoop

Dogg

A-Rod

Shaquille

O’Neal

Sammy

Hagar

Donald

Trump

Jay-Z

Ciara

Billy

Beane

Serena

Williams

Colin

Kaepernick

Larry

Kudlow

Involved in a SPAC

(Corrects a photo of Oakland Athletics executive Billy Beane)
Source: Bloomberg research

SPACs risk becoming a victim of their own success.

Most need to find a target within two years of their IPO. Unless shareholders vote to extend the term, the structure returns the cash raised to investors and the SPAC sponsor doesn’t make anything on the transaction. Banks are also incentivized to get a deal done, because most of their underwriting fee is typically delayed until a deal is completed.

Deal Deadlines

Hundreds of SPACs are required to complete mergers in the coming months
Note: Deadlines don’t reflect potential extensions available to some SPACs. Data is for SPACs tracked by Bloomberg as of mid-October.
Source: Bloomberg

There are more than 500 U.S.-listed SPACs that have completed IPOs and are searching for a company to take public, according to Bloomberg data. That’s more than twice the number of SPACs that have gone public since 2018 and completed mergers since. The clock is ticking. Critics say the pressure to get deals done before deadlines to return money to investors means transactions will get riskier or more expensive as sponsors get desperate.

“The SPACs are going to have to compete with each other in a game where the targets should do very well,” Klausner said.