SPACs and M&A Transactions

The past few years have seen an extreme surge in special purpose acquisition companies, or SPACs. These transactions are viewed by some as favorable to traditional IPOs due to certain benefits they offer, such as an expedited timeline, lower transaction fees, and pliability of transaction structures.

Still, these advantages don’t always play out to be as such, and those involved may run into issues with inadequate due diligence, complicated market conditions, and the dilution of shares.

Current SPAC Surge

SPACs have existed for decades. Also known as blank check companies, they are formed solely for the purpose of completing an initial public offering to ultimately acquire an existing company.

The last time the U.S. saw an uptick of SPACs was back in 2007, with 66 SPAC IPOs – according to SPAC Analytics. Since then, the field has been relatively quiet up until recently.

According to the Audit Analytics Initial Public Offering database, there were 1,662 IPOs between January 1st, 2018 and August 1, 2021. Of these, 733 were completed by SPACs. As of August 2021, 301 have commenced a merger or acquisition transaction where it has either closed or has yet to close.

So far, 185 SPAC transactions commenced between January 1, 2021 and August 1, 2021, compared to three in 2018, 25 in 2019, and 88 in 2020. To stress the prevalence of these transactions, this year alone has already seen 69 more transactions than the previous three years combined.

SPAC transactions commenced between 2018 and 2021

Length of Time from SPAC IPO to M&A Commencement to Transaction Close

Most SPACs have 24 months from the date of their IPO to complete a merger or acquisition transaction. If they do not commence one, they must return funds to their investors and dissolve.

The average length of time from an IPO to the commencement of a SPAC transaction is about nine months, with a median of six months. These numbers are based on SPAC IPOs that occurred on or after January 1, 2018.

Duration frequency: SPAC IPO to M&A Transaction Commencement

As shown above, there are nine outliers that have exceeded the 24 month time period. Trident Acquisitions Corp. is the only company that exceeds 30 months at 33 months from IPO to commencement. Trident initially had 18 months to complete an acquisition. In November 2019, the SPAC extended the deadline an additional six months from December 1, 2019 to May 29, 2020.

Once a transaction is commenced, the goal is to complete (or close) it. According to PwC, it can take approximately three to six months for a SPAC transaction to close, while a traditional IPO takes roughly one to two years. Once the transaction is closed, the formerly private company is now public.

The average length of time from the commencement of a SPAC transaction to the close of a SPAC transaction is 4.5 months, with a similar median. These numbers are based on SPAC IPOs that occurred on or after January 1, 2018.

Duration frequency: SPAC M&A Transaction Commencement to Close

The quick nature of SPACs is both a risk and reward with these transactions. For those looking to expedite a transaction, the fast-paced timeline of these companies is enticing. As mentioned above, they can take as little as three months to complete a transaction, while traditional IPOs can take up to eight times as long. On the other hand, this could lead to instances where due diligence might not be as thorough because it is less stringent than a traditional IPO. KPMG states that this could potentially lead to mis-valued businesses, restatements, and lawsuits.

An example of this is the case of Stable Road Acquisition Company and Momentus Inc, a space transportation company. Those involved were charged with misleading claims after an investigation by the SEC. Investors were told that the technology had been tested successfully; however, only one in-space test was completed, and that test was a failure.

Former Momentus CEO, Mikhail Kokorich, who stood to earn approximately $200 million in shares, misled investors to believe that this technology worked. National security concerns relating to Kokorich were also misrepresented and skewed, leading to the company’s inability to acquire necessary governmental licenses. Stable Road failed to appropriately review these statements, despite confirmation that it had done so. The information relayed was unreliable, and due diligence was deficient.

After the SEC’s investigation, it was determined that Momentus and Stable Road were guilty of wrongdoing and hefty penalties were imposed.

Momentus and Stable Road stood to benefit greatly from this transaction. Due to the misrepresentation and inaccurate information produced by both parties, investors were not given the opportunity to make sound decisions.

Open and Closed SPAC Transactions

Of the 301 total SPAC transactions that have commenced, 146 have closed, while 155 remain open and ongoing.

Open vs. closed SPAC transactions

Of the 733 SPACs that have gone public since the beginning of 2018, 432 have yet to commence a transaction.

It is important to note that not all commenced transactions are completed, for a variety of reasons, including regulatory challenges. A prime example, as reported by the Wall Street Journal, is the case of the SPAC Pershing Square Tontine Holdings, Ltd and the proposed deal with Universal Music Group. Due to the complex structure of the deal, questions were raised about the transaction’s competency under NYSE rules by the SEC. Eventually, the SPAC transaction was abandoned.

Market conditions have also muddled some SPAC transactions. With less than a month left to complete the merger between TGIF Holdings, LLC and Allegro Merger Corp, the two companies determined to mutually terminate their agreement due to complicated market conditions and the inability to meet closing conditions. Funds raised were distributed back to shareholders.

SPACs have become popular among day-trading retail investors. These investors do not have a long-term interest in the company itself and, as a result of this, have not been voting. To approve a transaction, a quorum of votes is required and the lack of voting from those investors prevents approval. Such was the case in the transaction between Switchback Energy Acquisition Corporation and ChargePoint, Inc; there were not enough stakeholders present to vote in a special meeting held earlier this year, so Switchback adjourned the meeting and reconvened at a later time. A quorum was eventually present and the transaction garnered enough support to pass.

Transaction Value

The range in what Audit Analytics refers to as Transaction Value, or purchase price, is wide. With the lowest transaction value being $1.275 million and the highest being $30.36 billion, the average value across transactions involving SPACs is $2.145 billion.

It is important to note that when calculating transaction value, Audit Analytics does not capture pro-forma values or values disclosed that are for the combined company after closing. Some transactions did not provide a transaction value. Both the pro-forma and combined values and the blank values were not included in this calculation. Audit Analytics does use enterprise values if they are provided.

As with the length of time, there are both positive and negative aspects to the cost associated with SPAC transactions. With these transactions, there are potentially lower transaction fees. However, a sponsor typically receives 20% in shares of the company, worth approximately 25% of the proceeds of the IPO. Sponsor shares are a deterrent because of the dilutive impact the shares have on the stake additional shareholders own.

SPAC transactions present anticipated and inherent advantages that traditional IPOs do not. This has contributed greatly to their popularity, as seen in the remarkable rise in these transactions over the past few years. Nevertheless, those involved should also anticipate issues that may arise, either out of or in their control.

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