After a record rush of special-purpose acquisition corporation (SPAC) initial public offerings earlier this year, the trend has slowed to a gentler, but steady pace this fall.
Now the backlog of SPACs trying to buy a company has grown and that has changed the dynamic between the sponsors and limited number of viable, privately held target companies they’re trying to acquire.
It’s easier nowadays to debut a SPAC than it is to do M&A deals, for a variety of reasons. And the clock is ticking.
SPACs, or blank-check companies, raise money in an initial public offering and then seek to buy a business or businesses. Typically, they have two years to ink a deal, or else they have to return money to shareholders.
As of Oct. 13, 529 already-public SPACs have not closed an M&A deal, even as more SPACs debut their shares, according to data service provider PrivateRaise.
As of the same date, the rollicking new issues market of 2021 has successfully launched 456 SPAC IPOs for combined proceeds of $116.6 billion. Those figures already outpace the full year of 2020, which saw 248 SPAC IPOs with combined proceeds of $75.5 billion.
Yet as of Oct. 13, only 222 SPAC business combinations have taken place in 2021, up from 58 in the year-ago period, according to PrivateRaise. Adding to the logjam are roughly 308 SPACs in registration that have yet to begin trading.
“Two years ago if you’d been a SPAC and you came knocking, your target company would not have heard from another SPAC,” said Bill Meagher, senior reporter for The Deal. “Now, if you’re targeting a company, you have to assume they’re in touch with other SPACs. It’s not unusual to have a half dozen SPACs involved with a target company. It is almost like a beauty pageant in some ways.”
SPACs are not only competing with other SPACs, they’re also squaring off against private-equity firms shopping for portfolio companies. That makes it even harder for SPACs to put their money to work, said Joe Mantone, news desk manager for U.S. financial institutions at S&P Global Market Intelligence.
“There’s a backlog of SPAC acquisitions and there’s a lot of money chasing deals,” Mantone said. “It’ll be interesting in how it plays out.”
SPACs regain their footing
Recapping 2021’s historic SPAC IPO action, the market rose to a steady pace in the third quarter, after a big slowdown in the previous quarter and a huge rush of SPAC deals earlier this year.
Twenty-six SPAC IPOs raised $5.4 billion in September, preceded by 26 SPAC deals in August with combined proceeds of $4.73 billion and 23 deals in July that raised $4.89 billion, according to S&P Global Market Intelligence.
By contrast, in April, only nine deals raised $2.4 billion as the SPAC market cooled off considerably from March, when a whopping 99 deals raised $34 billion.
S&P’s Mantone said SPAC activity was chilled in the second quarter by comments from the Securities and Exchange Commission.
The SEC sparked concerns over increased regulatory scrutiny with a decree that warrants in SPACs owned by early investors should be declared as liabilities, not an asset on a company’s balance sheet. The action caused public SPACS to restate their books and impacted the IPO pipeline.
The SEC issued a warning on SPACs issued by celebrities and cautioned investors to not buy shares based solely on a SPAC executive’s public profile
The SEC also zeroed in on overly optimistic forecasts by SPAC merger companies, in the wake of allegations about inaccurate business projections by Lordstown Motors
and Nikola Corp.
But once the SPAC market digested these changes over the summer, SPACs have resumed a healthy pace amid mostly bullish conditions in the overall equities market.
“While it’s much lower than it was in the first quarter, it’s higher now than it’s been historically,” Mantone said.
When a SPAC buys a target company, it typically lines up institutional investors to purchase privately-issued stock in the combined company. These private investments in public equity, or PIPE deals, have had changing dynamics as well.
Nowadays, PIPE investors are able to be a bit more demanding with terms because the large number of deals out there have given them leverage.
“PIPE investors are getting a better deal because there’s a little more perceived risk involved,” said The Deal’s Meagher. “Also, you have to be realistic about the overall market. There are a lot of SPACs looking for deals right now.”
If a SPAC purchaser manages to line up prominent PIPE investors such as Wellington Management, it can provide validation of a proposed business combination, he said. In other cases, some PIPE investors are not even identified by name.
The value proposition for a company to go with a SPAC buyer is that the company will go public, if that’s something that the seller wants. SPACs may often be able to outbid private-equity firms in some situations, especially if they’re able to line up PIPE investors to back the deal.
Up until about 2019, SPACs for many years were seen as useful vehicles for companies that were unlikely to be able to do a traditional IPO. But Wall Street and private-equity firms started wading into them more frequently over the past two years, and have been reaping the benefits that flow from deals and sponsorship.
White shoe firms such as Goldman Sachs
and private-equity firms such as TPG raised the profile of the deal type.
Investors also warmed up to SPACs as a source of potential returns in a low interest environment.