SPACs splash the cash to salvage deals as market unravels
SPACs are turning to costly new tactics to keep investors from jumping ship as market confidence wanes in the once red-hot alternative to IPOs.
Blank-check acquisition firms and the companies they acquire are having to hand over bigger stakes in the ventures to investors in some cases, often at big discounts. Deal managers are also seeking backstop financing from investment firms and plowing in more of their own cash.
Less than three months into 2022, 13 mergers involving special purpose acquisition companies have already fallen through in the United States, according to data from industry tracker SPAC Research. That compares with a total of 18 in the whole of 2021.
In money terms, almost $9.5 billion worth of mergers have been canned this year, according to Dealogic data.
The main cause of deals being abandoned, market players say, is the risk of redemptions – where investors exercise their right to sell shares in the venture back to the SPAC before the merger is completed, and for the price they paid for them.
“Every transaction is worried about redemptions and every transaction is trying to figure out how to mitigate it,” said Amir Emami, global co-head of SPAC coverage at RBC Capital Markets.
The approaches being employed by SPACs include offering bonus stock to investors who choose not to redeem shares.
SPACs are shell companies that raise money in an initial public offering and put it in a trust for the purpose of merging with a private company and taking it public. Since investors are unaware of the target company ahead of the IPO, SPACs often grant them the right to redeem their initial investment as an incentive to put their money in the trust.
Yet significant redemptions undermine the viability of such deals. At the same time, shares of many companies that went public during the boom last year have fared poor, leaving some investors nursing losses and making new SPACs look more risky.
Indeed, the deals are drying up.
Only 24 SPAC mergers worth $28.3 billion have been announced so far this year, versus the 93 deals worth $233 billion in the first quarter of 2021, according to SPAC Research. Only 48 new SPACs were floated on U.S. exchanges up to the end of February, compared with 214 during the same period last year, according to data from Dealogic.
“What was an attractive deal, say six months ago, may not be as attractive today given the market has sold off meaningfully since then,” Emami said.
Measures such as offering extra stock have been successful in getting some mergers over the line, yet can come at a heavy financial cost for the SPAC managers, their target companies and their original investors, who become diluted.
“With a high number of SPACs still seeking targets and the skepticism due to the pullback in the market, it has become harder to persuade target companies to want to engage with SPACs and have the related management distraction,” said Atif Azher, partner at law firm Simpson Thacher & Bartlett LLP.
Bonus stocks, or “bonus pools,” for investors who eschew redemptions, are typically comprised of founder shares or regular company shares that were reserved for the SPAC managers.