The world’s largest Spac deal has lift-off: Singapore’s superapp Grab announced on Tuesday that it will use a special purpose acquisition company to float on Nasdaq at a value of close to $40bn.
But the rest of the Spac market is deflating rapidly, with potentially dire consequences for investors and entrepreneurs who hope to tap a relatively quick method of joining a stock market.
For more than a year, Wall Street luminaries, sports stars and celebrities have been falling over themselves to sponsor initial public offerings for these so-called blank cheque companies that then seek to merge with promising private targets.
More money, some $100bn, has been raised this year though Spac IPOs than in the previous records set in 2019 and 2020 combined. Now the value of companies coming to mostly US stock markets through what are known as de-Spac mergers has also hit an all-time high, according to Dealogic.
Some are genuinely innovative, but others feel like the last days of a bubble: six de-Spacs involve makers of lidar sensors for self-driving cars; at least three are electric vehicle charging companies; and five EV makers are each promising to reach $10bn in sales in record time.
There is trouble looming. Many Spacs take on such large targets that they need extra funding at merger time, and the institutional investors who usually pony up are growing reluctant. Some are overwhelmed by the sheer number of deals; others worry that prices have become too rich for what are often speculative ventures.
At the same time, short-sellers have quadrupled their bets that Spac share prices will go down, to $2.8bn, since the start of the year, says S3 Analytics.
Regulatory concern has also shot up. In March, the US Securities and Exchange Commission warned retail investors not to buy Spacs just because of celebrity sponsors. It also started taking longer to process Spac filings. Now a top SEC official has warned Spac participants that the process is under “unprecedented scrutiny”, and reminded sponsors and bankers not to make promises to investors that they cannot keep.
“A de-Spac transaction gives no one a free pass for material misstatements or omissions,” said John Coates, who heads the corporate finance division.
The numbers of Spac IPOs and de-Spac mergers coming to market have fallen since mid March. The Ipox Spac index, which tracks share prices and had risen 26 per cent by mid-February, has given up this year’s gains. Even optimistic bankers and lawyers are talking of a pause. Veterans, who remember another big Spac wave in 2007, are muttering darkly of a bust.
Much of the scepticism is well placed. It is hard to imagine the nearly 700 Spacs looking for targets or hoping for an IPO will all find good deals. Those that have merged are paying over the odds for their partners. In 2021, Spacs that have merged with tech companies have paid on average nearly 13 times the previous year’s revenue, more than quadruple that paid when one tech firm bought another, says 451 Research.
Some sponsors have also exploited a legal wrinkle that they say gives de-Spac mergers more leeway than traditional IPOs to make rosy projections of future earnings. Not surprisingly, recent de-Spacs such as Romeo Power and Canoo are already falling short.
But that is no reason to give up on Spacs completely. This method of taking companies public has some advantages. It gives smaller investors the chance to put money into early stage ventures. The structure carries high fees and risks, and bigger participants get much better deals than retail investors. But after years of being shut out as promising companies have stayed private, some people would like to buy in.
For a company looking to float, a de-Spac also makes sense if it needs to raise a lot of cash and wants a quicker process that nails down the share price early. Grab is raising $4.5bn, for example. That may be because a company has an innovative and capital-intensive business plan (potentially good news), or because its early investors and founders want to cash out (a warning sign).
It is too hard right now for investors to tell these motives apart. The watchdogs should step in. The SEC has already warned de-Spacs about selling themselves with misleading predictions and taken a closer look at their accounting. Tough punishment should follow for those that misbehave.
US regulators — and others seeking to lure Spacs — must do more. Tougher disclosure rules should set standards for projections and make it easier for investors to see who is profiting and how. Spacs aren’t for everyone but, done right, they have a place in the market.