As the SPAC boom was beginning to rage two years ago, this column asked why in the world any company would want to be acquired by a former chief executive best known for executing one of the worst acquisitions in Silicon Valley history.
The answer, it turns out, was that no company wanted to be acquired by Leo Apotheker’s Burgundy Technology Acquisition Corp., at least not at a reasonable price. Burgundy ended up liquidating in March, a fate that may await any number of the hundreds of special-purpose acquisition companies, blank-check vehicles known as SPACs that became a home for billions of dollars during the COVID-19 pandemic.
The most recent liquidation came from the biggest SPAC of them all — Bill Ackman’s Pershing Square Tontine Holdings PSTH, +0.07% said this week it would return $4 billion to investors and shut down, as it was “unable to consummate a transaction that both meets our investment criteria and is executable.”
For those who are still invested in a SPAC, liquidation may ultimately be the best outcome among many poor paths, experts said.
“It’s a noble thing to do,” said Stanford University professor Michael Klausner, who has been studying SPACs for the past couple of years. “It would be far worse to enter into a bad deal, which is what most SPACs have done.”
Many SPACs face questionable acquisitions, by potentially overpaying for companies that may or may not achieve their financial projections. The other options for investors would be to wait until a merger is announced and request share redemption ahead of the deal, or the least recommended: Ride out the merger.
The data gathered by SPAC Research and compiled by Dow Jones Market Data does not bode well for any SPAC mergers. According to SPAC Research, 381 blank-check companies made acquisitions since 2016, with 300 of those deals occurring since early 2020. On a median basis, the stocks of those 381 companies, post-SPAC, are down 66.6% since the deals were announced.
There are nearly twice as many SPACs still seeking a target or facing possible liquidation. There are 590 publicly traded SPACs facing a deadline to find an acquisition target within the next two years, according to SPAC Research data.
“SPACs from the start have been a terrible structure for investors,” said Klausner, who has co-authored several papers and articles on SPACs, including “A Sober Look at SPACs.” “And what’s happening now is 100% predictable, was predicted — we predicted it. The mystery is why it took so long for the market to figure it out.”
Even so, criticism from Klausner, many other academics and the media (this column included) did little to slow the SPAC boom. A wide range of investors helped fuel the mania, from high-profile billionaires like Ackman, sports stars like Draymond Green and Rory McIlroy, to former President Donald Trump to a range of business executives. They were touted as a lower-cost, streamlined way to take a company public. But because target companies are not involved in the IPO process, some have made ridiculously optimistic or downright false financial projections, because they were not bound by the same securities laws as regular IPOs about making forward-looking statements.
Chamath Palihapitiya, for example, is best known for buying Virgin Galactic Holdings SPCE, +2.16% with the first of his nine SPACs, and was dubbed the “Pied Piper of SPACs” by the New Yorker. The shares in his three de-SPACs, however, have since fallen, even though Palihapitiya has managed huge personal gains from the deals. In a recent report by Massachusetts Sen. Elizabeth Warren’s office, Palihaptitiya is listed as an example of the misaligned incentives in SPACs and how the sponsors are rewarded, especially “serial SPAC sponsors,” while leaving retail investors “at risk from SPACs’ convoluted structure and incentives for dilution, fraud and abuse.”
In the end, it is these sponsors, like Palihapitiya and Virgin Galactic’s Richard Branson, as well as Wall Street investment banks for the initial SPAC IPO, that walk away with the big gains. The remaining original IPO investors who are still in these stocks, for the most part, will be lucky to get out with their initial investment. But for the most part, the original IPO investors are long gone.
Too many SPACs face looming deadlines
Apotheker, who was CEO of Hewlett-Packard Co. when it made the ill-fated Autonomy deal, was co-CEO of Burgundy Technology Acquisition, which liquidated its SPAC in March. In an email discussion, Burgundy’s co-CEO, Jim Mackey, detailed to MarketWatch the problems that SPACs are running into in trying to close a deal before they hit the same point.
“There are too many SPACs, which caused significant competition for assets and the overvaluing of those assets due to auctions that were run instead of trying to agree on the appropriate value via results and comps,” Mackey said.
Mackey described “auctions” run by startups for which SPACs are competing, which sound similar to the frenzy in the housing market during the pandemic, where real-estate agents set offer deadlines for hot homes and expected the potential buyers to bid well over asking.
Since he could not talk about specifics, he said in general, “the sell-side bankers ran a typical auction to get multiple bidders to bid on assets in a specific timeframe.” Mackey said that he and Apotheker believed “an alternative to the traditional IPO was needed,” but now SPACs are not able to find high-quality targets.
“The math analysis certainly suggests that there are not enough quality assets for the amount of SPACs that were permitted into the market,” Mackey said.
“Competition for actionable targets is fierce as market forces and regulatory action have reduced the overall opportunity set,” said George Kaufman, partner and head of investment banking at Chardan, an investment bank in New York that has been involved in 118 SPAC deals, in an email.
Many could face a similar fate as Burgundy: Over the past seven years, 17 SPACs have liquidated, but seven of those have been in the past six months, including three in June. In addition, the money from private equity, often invested by firms like Black Rock, Fidelity and others, at the time the SPAC found a merger target, is no longer available. “That market has dried up,” Klausner said. “So Apotheker, he may have had no option, this is going to be true of a lot of SPACs that are out there now.”
In a liquidation, the blank-check company returns the core investment to the original shareholders, who paid $10 a share. The sponsors, warrant holders and founder shareholders lose their invested amounts, however. If they do find a target, SPACs may be paying over-inflated prices for companies that are not quite ready to go public or have questionable business models (as we have seen with many already completed deals).
“Shareholders are pretty leery of transactions right now,” said Michael Dambra, an associate professor at the University of Buffalo School of Management, adding that there have been a string of failed mergers. “High-growth firm valuations have plummeted, and influential investors are worried about paying the earlier agreed-upon prices.”
The possibility of liquidation is for the early retail investors the best possible outcome, he said. At least for those investors, they are getting back the $10 per share they invested in the initial public offering of the SPAC before it pursued a questionable merger, which is what is happening in some cases right now, also known as the de-SPAC process.
Mergers do not always end well
Even if a merger is completed, it could still lead to disappointing results. A cautionary tale was seen with a company that provides electric vehicles for last-mile delivery, called Electric Last Mile Solution Inc. ELMS, filing for Chapter 7 bankruptcy, saying it ceased operations and was going to liquidate. It recently received a notice from the NASD that it would be delisted, after its shares closed below $1 for more than 30 days. Earlier this year, it had to restate some of its financials, at the request of the SEC.
Another recent bankruptcy of a de-SPAC was headed up by former Apple Inc. AAPL, +0.52% retail veteran Ron Johnson, who founded Enjoy Technology Inc. ENJYQ, -22.22%. The company, which operates mobile retail stores for consumers, was purchased by a SPAC, Marquee Raine Acquisition Corp., last year. In late June, Enjoy Technology filed for Chapter 11 bankruptcy and is now reorganizing under an agreement with Asurion LLC, which secured a bridge loan for Enjoy, which is winding down its operations in the U.K. and in Canada. It is pausing its at-home experiences to Apple customers in the U.S., while it focuses on reorganizing, according to recent SEC filings.
In March, a high-profile SPAC group, Queen’s Gambit Growth Capital, completed a de-SPAC with shareholder approval of its acquisition of Swvl Holdings Corp. SWVL, -18.13%. The all-female executive team acquired the developer of transit apps, in a deal that valued the company at about $1.1 billion, with proceeds of around $405 million, including $100 million from a group of private investors and the proceeds of the IPO, which is held in trust.
But late last month, Swvl Holdings announced a “portfolio optimization” program, that included a 32% cut in its workforce, with a goal of being cash-flow positive in 2023. Youssef Salem, Swvl’s chief financial officer, said in an email that the company was laying off 1,200 people, but he declined to comment further on how the merger was going. Swvl is focused on emerging markets, where users can book seats or a ride on whatever vehicle is available to commute within their city. Since being acquired in March, Swvl’s shares have fallen nearly 33%, and are trading at $6.76.
In late April, the same group shelved Queen’s Gambit Growth Capital II, a SPAC that was expected to raise $300 million. Officials at the Queen’s Gambit Growth Capital Fund did not respond to a request for an interview.
In addition to shelving IPOs and liquidating, some mergers are also falling apart. Kaufman of Chardan noted that previously announced deals are “increasingly terminating or revising guidance, repricing, and restricting.”
Kin Insurance for example, had agreed to merge with Omnichannel Acquisition Corp., the SPAC led by Matthew Higgins, vice chairman of the Miami Dolphins, which touted sports stars Green and McIlroy as investors. Kin canceled its merger agreement in January, at the beginning of the stock-market turmoil, citing market conditions. Last month, Omnichannel said it would redeem all the outstanding Class A shares to its investors.
These deals, past and proposed, are now facing more regulatory scrutiny, just as they face the looming deadlines to find a merger partner.
U.S. regulators are now making some moves, scrutinizing a few questionable deals. In March, the SEC proposed new rules for blank-check companies and shell companies, that would enhance the disclosures required by companies, including forward looking statements, and offer more investor protections.
On Capitol Hill, Warren is also working on a new bill, called the SPAC Accountability Act of 2022, to increase the legal liability for sponsors and others involved in the deals, noting that these blank-check companies “incentivize inadequate and even fraudulent disclosure,” and “allow for rampant self-dealing at the expense of retail investors.”
But now, as the wheels come off some of these deals, and regulators begin to pay more scrutiny, these recent events will create more clouds for all SPACs with looming deadlines to find a merger partner. Already, forming a SPAC as an investment vehicle has fallen out of favor, as concerns about regulatory changes loom. After surging to a record of 613 SPAC IPOs in 2020, raising more than $160 billion, there have been only 69 SPAC IPOs in 2022 so far, raising $11.8 billion. And in mid-June, the SEC subpoenaed Digital World Acquisition Corp. DWAC, +3.93%, seeking more information over its pending acquisition of Trump’s Truth Social company.
Additionally, as regulators start to pay more attention to SPACs and the issue of forward-looking statements made by the target companies, some are also shelving their plans to go public. According to Renaissance Capital IPO, +0.99% IPOS, -1.47%, which researches and tracks IPOs, so far this year, 76 SPACs have withdrawn their IPOs, compared with one last year.
Essentially, the biggest winners in the SPAC boom were the initial IPO investors, those who invested when a SPAC first went public, and sold when the stock reached a high during the crazy mania of 2021, many of which were hedge funds.
“So the IPO stage is just a gravy train for hedge funds that participate in it,” said Stanford’s Klausner. Those hedge funds that dominated the SPAC market were often called the “SPAC Mafia.” None of those early investors hold the shares through the time of the merger, he said. “The ones that come in on the secondary market after the IPO, those are the ones that get screwed. The IPO investors are gone….I cannot understand why anyone would remain invested in a SPAC.”