It took only 10 months for Quanergy Systems Inc., a maker of high-tech sensors and software, to go from its stock market debut to filing for bankruptcy. Fast Radius Inc., a 3D-printing company, made it nine months. Online retail startup Enjoy Technology Inc. lasted eight-and-a-half months before it filed.
What these companies all have in common is the way they made it onto the market. Instead of selling shares in a conventional initial public offering, each of them merged with a special purpose acquisition company. A SPAC is a publicly traded corporate shell with no business other than to seek out a merger with another company, which then inherits the shell’s listing. Such deals were a pandemic-era Wall Street fad—but now a growing number of ventures that went public in this way have gone bankrupt, highlighting how speculative the SPAC game could be.
Internet service provider Starry Group Holdings Inc. on Feb. 20 became the latest to seek protection from creditors, bringing the count of failed SPAC offspring to at least eight since June 2022. The trend is likely to be just getting started. Almost 100 companies that listed this way don’t have enough money on hand to fund their current level of spending over the next year, data compiled by Bloomberg show. That’s on top of the 73 companies that currently trade below $1 a share, risking a potential delisting from major exchanges such as the New York Stock Exchange and Nasdaq. Since the baseline share price of most SPACs before a merger is $10, a price below $1 also means that an investor who bought into the shell company in anticipation of a deal and held on for the full ride lost at least 90%.
“The value destruction has been spectacular,” says Dan Zwirn, co-founder of Arena Investors LP, a debt-focused investment firm. The way Zwirn sees it, troubled SPACs are usually one of two types: totally speculative businesses or reasonable ones that were grossly overvalued. The former will go bankrupt or be quietly wound down, while the latter can be sold for low prices, he says. So far, at least 12 companies that did SPAC mergers have agreed to buyouts for less than they were worth when they listed, according to data compiled by Bloomberg.
Although SPACs have been around for decades, they took off in the trading boom of 2020-21 that also propelled cryptocurrencies and meme stocks. Sometimes called blank-check companies, they have no operations but simply raise money by going public with the stated goal of buying another business in a specified period of time. There was a widespread view that SPACs were a faster, easier way to take cutting-edge companies public, sidestepping some of the legal and regulatory hurdles traditional IPOs face. (The US Securities and Exchange Commission is now mulling tougher rules for SPACs.)
Sponsors can earn big money from SPACs because they get a chunk of stock in the newly public company if they can close a deal. Meanwhile, the early investors, often hedge funds and other institutions, secure a nice, safe return for a while. That’s because each $10 share of a SPAC can be redeemed, with interest typically around 1.5%, before the merger. There’s also a sweetener: a “warrant” entitling holders to buy more shares at cheap prices if things go well.
But the low-risk deal that hedge funds got isn’t what drew retail investors to blank checks. The companies targeted for acquisition often made highly optimistic forecasts for revenue and earnings growth. And in hopes of getting in early on some hot new business, retail traders would buy SPAC stocks ahead of the expected merger or just after—sometimes paying well above $10. SPACs merged with and took public money-losing electric vehicle startups, early-stage drug developers and a bevy of other companies that promised to change the world.
Sometimes it worked if the retail investor played it right: A SPAC called Diamond Eagle Acquisition Corp. climbed past $17 a share before merging with DraftKings Inc., the online sports betting company, in early 2020. Then the stock, renamed DraftKings, rocketed to a peak of $74 over the next year. (It’s at about $19 now.)
As the hype grew, more and more money piled in. Famous money managers, former politicians and celebrities lined up to start new blank-check vehicles. Over the course of 2020 and 2021, more than 850 SPACs raised roughly $245 billion to use in the hunt for deals. The quality of new offerings declined in a hurry. Sponsors selected more speculative acquisitions or struggled to find worthy deals at all. Then came higher interest rates and the 2022 bear market. Today an overwhelming majority of public companies that were formed when a SPAC made an acquisition—sometimes known on Wall Street as a “de-SPAC”—are trading far below the $10 mark and are years away from turning a profit.
“A lot of the problems with the de-SPAC’d companies is that they’re relatively early-stage, capital-intensive companies that are more risky in general,” says Usha Rodrigues, a law professor at the University of Georgia and one of the leading academic experts on SPACs. “There was nowhere near that number of viable private companies ready for the public markets.”
Many companies have been hurt by a surge in redemptions. When SPAC investors don’t like an upcoming merger or simply wish to recoup their money, they can redeem their shares before the deal goes through. Over the past year, the average SPAC saw more than 80% of its shares cashed in, data compiled by Bloomberg show. That compares to a single-digit rate in early 2021. These redemptions mean that companies raise less cash from the deal.
In the case of Starry Group, the company hoped to raise as much as $450 million when it merged with FirstMark Horizon Acquisition Corp. last March, assuming none of the SPAC investors took their money back. But FirstMark shareholders chose to cash in more than 90% of their SPAC shares when they approved the combination. Although other investors also kicked money in, the redemptions reduced Starry Group’s bundle of new money to a little more than $155 million, according to court papers. It traded for about 11 months and now plans to sell itself out of bankruptcy or repay its lenders with new stock.
“It’s just a cautionary tale,” says Greg Martin, co-founder of Rainmaker Securities LLC, which facilitates secondary transactions for private companies, speaking on SPACs in general. “When something is too good to be true, it’s too good to be true. It’s so obvious when you look at the valuations some of these companies were getting from SPAC sponsors that it wasn’t sustainable.”
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