SPACs Are Scrambling to Find Mergers. What That Means for Investors.
The clock is ticking for many special-purpose acquisition companies, or SPACs, formed in 2020, including the biggest, Bill Ackman’s $4 billion Pershing Square Tontine Holdings . They all have just months to find a deal or risk having to give investors back their money.
Some 602 SPACs, also known as blank-check companies, with a combined $162.4 billion in funds, are currently out hunting for acquisitions, according to data from SPAC Research.
“A number of SPACs will likely not find merger targets and will expire and return the cash in trust to investors because there are too many SPACs chasing deals right now,” says Justin Kotzin, a managing director and head of capital markets at growth-equity firm General Atlantic. “They can’t all find attractive deals.”
A SPAC raises money in an initial public offering with the goal of finding a private company and merging with it. The money raised in the IPO sits in a trust earning interest until a merger is closed. If there is no deal in a period—typically two years—investors get their money back.
If hundreds of SPACs have to return money, that would be a significant shakeout, says Evan Ratner, president of Levin Capital Strategies, a New York money-management firm that has invested in SPACs. “This would be good for surviving SPACs, because there will be less competition for them to find acquisitions,” he says.
Pershing Square Tontine (ticker: PSTH) called off its plan to buy 10% of Universal Music Group in July 2021. As a result, it now faces a July 24 deadline to close another merger. That can be extended to Jan. 24, 2023, if it has a letter of intent, an agreement in principle, or a definitive agreement with a business, according to regulatory filings. A spokesman for Pershing Square Tontine declined to comment.
Social Capital Hedosophia VI (IPOF) is another big SPAC from 2020 that has yet to clinch a deal. One of the blank-check companies from venture capitalist Chamath Palihapitiya, it raised $1.15 billion and has until Oct. 14 to find and close a business combination, according to filings. Palihapitiya has another SPAC from that year, the $460 million Social Capital Hedosophia IV (IPOD), which has the same deadline and hasn’t closed a deal yet, either. Social Capital declined to comment.
All three are part of the SPAC class of 2020—the 247 blank-check companies that listed their shares that year, according to Refinitiv data.
A little more than half, or 58%, of those SPACs have found and closed acquisitions, an analysis by Barron’s has found. That means that 105 SPACs, including 33 that have deals pending and 72 that have yet to find a target, haven’t been able to complete a merger.
SPACs became wildly popular during the second half of 2020—the 247 SPACs that went public that year was, at the time, the most ever. That record was toppled in 2021 when 613 blank-check companies began trading, according to Dealogic.
Don’t expect records to get broken this year. Broad market volatility and inflation fears have caused the pace of new issues—both SPACs and traditional IPOs—to slow considerably. Forty-one SPACs have filed to list their shares as of Feb. 4, down nearly 76% from 171 SPACs for the same period in 2021.
Blank-check companies are promoted as a way for retail investors to participate in buyouts that are usually reserved for private equity or venture capital. Retail investors can buy shares of a shell-company SPAC once they begin trading, usually at a price of $10 a share.
Many SPACs, however, haven’t done well after going public. While predeal SPACs would often trade at a premium, for several dollars above $10 a share, that is now rarely the case. Of the class of 2020, about 75%, or 187 SPACs, are trading at or below $10 as of Feb. 23, according to Renaissance Capital, which counted 248 SPACs listing in 2020.
The SPAC & New Issue exchange-traded fund (SPCX) is down more than 13% over the past 12 months. Healthcare-services firm MultiPlan (MPLN) is off 62% from its $10 offer price, while Grab Holdings (GRAB), the food-delivery company, is down 47%.
An outlier has been Lucid Group (LCID), an electric-vehicle start-up, which is up 140% from its $10 offer price.
About 59% of the SPACs that have listed their shares since 2020 and have not found deals are trading below $10, Renaissance says.
The fact that so many predeal SPACs are now trading below $10 presents an opportunity for investors.
SPAC shareholders can redeem their shares for the $10 a share trust value at the time of a vote on a potential merger, if they don’t favor the deal. That is also the case if the SPAC doesn’t find a partner by its deadline.
“We think this is a terrific way to enhance returns,” John Levin, CEO of Levin Capital, tells Barron’s. “If you buy a SPAC at $9.85 and you get $10, a yield of 1.5% in a short period is still very desirable.”
Once the SPAC completes a merger, investors can no longer redeem, and the shares trade like any other stock.
So, after a frothy boom, SPACs are suffering through some rough times. They may emerge stronger, but for now, investors can get many of these once-hot issues on the cheap.