The SPAC boom hasn't guaranteed winners
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Not all companies are fit to go public via SPAC, despite so many of them doing so.
Why it matters: While SPACs were quickly touted as a faster and better way for companies to go public, ultimately not all businesses that have chosen that route are meeting investor expectations.
The big picture: Nearly 200 companies have completed mergers with U.S.-listed SPACs since the beginning of 2021, across a range of sectors, including software, biotech, electric vehicles and sports betting.
- Still: SPAC stock redemptions started to pick up over the summer, with most in July at above 50%, signaling some investor discontent.
- There's also been an uptick in merger cancellations.
By the numbers: "For the 262 SPAC mergers that were completed during 2020 and 2021, the average stock price on Dec. 31, 2021, was $8.70, considerably below the average price of more than $10 per share at which the stocks traded at the time of the merger," says Jay Ritter, professor at the University of Florida's Warrington College of Business, who used SPAC Research data.
- Only a quarter (65 out of the 262) traded above $10, although some were above $35 per share (e.g., Heliogen, Virgin Orbit and CompoSecure).
- "The average stock price decline during the post-merger ('deSPAC') period for the 2020-2021 cohorts is noteworthy, given that the stock market finished 2021 near an all-time high," adds Ritter.
- According to a late November Wolfe Research report, mergers from that last three months had better returns (-2%) 30 days post-merger relative to the 2020 (-11%) and 2021 (-8%) cohorts.
- When comparing mergers with "experienced" and "non-experienced" SPAC sponsors at 30 days post-merger for the 2019-2021 cohort, the experienced group posted higher returns (-6%) compared to the non-experienced (-10%). The same goes for 7, 90, 180 and even 365 days post-merger, the report notes.
- Note: While median returns are nearly all negative, we're still seeing that the "experienced" group is faring better (and even hits +3% a year post-merger).
Between the lines: Whether the SPAC’s sponsor had expertise in the target company’s expertise is one of the strongest indicators of post-merger performance, according to Wolfe Research.
- For example, fintech company SoFi, which merged with Social Capital Hedosophia Holdings Corp. V (categorized as an "experienced" SPAC operator by Wolfe), saw its stock price appreciate following the completion of the merger. The SPAC’s stock also reacted favorably to the merger announcement and had virtually no redemptions. It continues to trade above $10.
- Similarly, companies merging with SPACs managed by top-ranking underwriters have also outperformed, according to a working paper by Minmo Gahng, Jay Ritter and Donghang Zhang.
- Overall, researchers' findings reinforce the common refrain throughout this boom that an elite group of sponsors and target companies will emerge and continue to do well.
What to watch: Whether the SPAC rush continues, or if more companies opt for IPOs or remaining private.
