3 reasons why businesses continue to complete SPAC mergers
Jump to heading 3 reasons why businesses continue to complete SPAC mergers
Let's take a little trip back to August 2021, shall we?
Every day, you began your daily routine by opening the Term Sheet email. Wow! That section on IPOs and SPACs is very lengthy. Those months are still fresh in my mind. For starters, it wasn't that long ago. Second, I began each day with a flurry of S-1 filings. There were loads!
It's no secret that the 2021 IPO celebration, which had a DJ and an infinity pool, unicorn inflatables, and shrimp ceviche hors d'oeuvres, was canceled when the markets crashed. SPACs have made things a little more tricky.
The SPAC part of our newsletter, although sometimes dormant in comparison to last year, is still very much alive and strong. Today, Freightos, an online freight transportation platform based out of Barcelona and Jerusalem decided to go public via a SPAC merger. It was ECARX Holdings, a Shanghai-based mobility tech startup, earlier this week. On May 19, there were two SPAC transactions: Surf Air Mobility, an electric aviation and air travel startup, and Marti, an electric bike-sharing app. Before that, there was Appreciate, a single-family rental marketplace and management platform located in Minnetonka, Minnesota, and Dragonfly Energy, a lithium-ion battery maker based in Reno, Nevada. You get the idea.
At the same time, several transactions are being postponed or falling through. Forbes and SeatGeek called off their mergers yesterday. Blade Therapeutics' special meeting was just rescheduled.
So here's something that has perplexed me: Why are any firms still going down this route when most companies are electing to remain private longer, startups are canceling merger plans, and regulators are proposing new regulations to tighten down on the SPAC disclosure requirements?
It's a query I put to Matt Kennedy, Renaissance Capital's senior IPO market strategist, who is generally able to answer my going-public queries.
Here are some of the factors at work:
• The SPAC market is experiencing a natural lag. Many of these SPAC transactions take months to reach an agreement, then another five or six months from the deal announcement to the actual completion. When de-SPACed corporations began to perform badly in public markets, it was simply the first gear in the wheel. First, the returns worsen. Then redemption rates begin to rise, agreements are canceled, SPAC firms are liquidated, and sponsors are hit with millions in fees. "It begins with terrible returns, but it takes a while for it to make its way through the system," Kennedy says, adding that "the deal announcements disclosed in May were in the works for many months."
• Capital may not be the primary motivator for going public. Because redemption rates are so high, SPAC mergers aren't yielding much money for corporations right now. "If you announce a transaction in this market, you have to be mindful that you might not obtain a lot of financing," Kennedy adds. However, there are other reasons you could want to go public, such as pre-existing investors and stakeholders or executives wanting an exit, or organizations having a longer-term perspective and wanting to go public so they can ultimately take advantage of capital markets.
• Niche investment banks are still open for business. According to Kennedy, large investment banks neglected the specialized SPAC industry for years. Until SPACs were too popular to shun during the epidemic, this area was dominated by boutique investment banks. Even when larger firms such as Goldman Sachs withdraw, smaller players, according to Kennedy, are filling up the void. "We witnessed a SPAC boom in 2007— not as big as the one we saw in 2021—but once that dried up, we saw a few hundred firms list via SPAC." That will very certainly happen again."
Whichever way you see it, we're unlikely to see another year like 2021, when there were over 200 de-SPAC transactions in the United States, according to White & Case statistics. Kennedy describes SPACs as the "ideal vehicle for the moment." "We had a very speculative bull run associated with firms that could estimate revenue growth of $0 to a billion in a few years," Kennedy adds.
However, if ordinary investors withdraw and the bull market collapses, that opportunity has passed — especially as the SEC raises its fist at such forecasts. Expect more SPACs to fall out of the gate — but save the shrimp ceviche for later.
For more SPAC news check out our other articles. To view all updated SPAC metrics for over 700 U.S.-listed SPACs, including liquidation date, yield to liquidation, last price, gross spread, and much more sign up for a free SPACinformer account.
(As of June 3rd, 2022, funds managed by Cohanzick Management, LLC and its affiliates own a position in COVA Acquisition Corp., and PropTech Investment Corporation II, but do not own a position in Gesher I Acquisition Corp., Tuscan Holdings Corp. II, Chardan NexTech Acquisition 2 Corp., nor Galata Acquisition).
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