Jun 3, 2022 - Economy

The SPAC market's miscalculation

Illustration of a pen filling out a check and having written several red no symbols on it.

Illustration: Brendan Lynch/Axios

Nineteen companies have canceled SPAC mergers in 2022, including this past week's terminations for Forbes and SeatGeek, representing nearly $18 billion of dumped deal value.

Why it matters: CEOs, boards, SPAC sponsors and private market investors all made a fundamental miscalculation in the benefits of going public via SPAC.

For years, we heard that SPACs could be preferable to IPOs because they were faster and had more price certainty.

  • The reality, though, is that SPAC mergers usually are more reliant on the investors who bought into the SPAC than they are on those that come in via the PIPE. Particularly given the SPAC's stock plus warrant structure. And those earlier buyers are often transient hedge funds that are prone to redeem when markets move south (as they have this year).
  • Sure, bankers often favor their own relationships in IPOs. But that book-building process can be robust enough to act as a bulwark against having shares tank after going public — something that has become all too common in the SPAC mergers that have managed to close.

The big picture: The SPAC market is more damaged than dead, given that there are over 120 mergers still waiting to close. Some of those will get done, with an edge likely going to smaller ones vs. larger ones, but many others will join Forbes and SeatGeek in the scrap heap.

  • It's also worth emphasizing that the IPO market is also stagnant, with hopes for a June flurry having faded.

What to watch: What happens to companies that had been counting on cash infusions via SPAC mergers, particularly as growth equity investors hold a tighter grip on their wallets. From darling to deSPAC to down-round?

The bottom line: Markets keep innovating around ways to go public, or at least recycling old structures. But the old-fashioned IPO keeps coming out on top.

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