Forget 10x Ideas, SPACs Are Struggling to Even Trade Above $10

Mohit Oberoi, CFA - Author

Sep. 7 2021, Published 1:25 p.m. ET

SPAC mergers have emerged as an alternative way to go public. While these blank-check companies have been around for a long time, they came of age in 2020 and rivaled traditional IPOs. However, 2021 has been a different ballgame and investors have been apprehensive about SPACs. How many SPACs have there been in 2021 and how many of them have been successful? Also, has the SPAC bubble burst?

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The SEC has taken a combative stance against SPACs. It has changed the warrant accounting rules and also imposed a fine on Stable Road Acquisition (SRAC) and its merger target Momentus.

How many SPACs have there been in 2021?

Looking at the number of SPACs, 2021 is another record year. According to the data compiled by SPACInsider, there have been 423 SPAC IPOs in 2021, which is way above the 248 that we saw in 2020. Meanwhile, 2020 was also a record for SPACs. The total IPOs in 2020 were more than what we saw in the previous 10 years combined.

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The total money that SPAC IPOs have raised in 2021 is $123 billion, which is above the $83.4 billion that they raised in 2020. However, the average IPO proceeds in 2021 are $292.3 million, which is lower than the $336.1 million for 2020.

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How many SPACs are trading below $10?

Until about a few months ago, investors pounced on SPAC stocks when they got near the $10 price level. Now, we're in a situation where several of the SPACs trade below $10. Several of the stocks trade below $10 even after the merger.

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According to the data compiled by CNBC, of the 125 SPACs that have completed the merger in 2021, 58 percent trade below the SPAC IPO price of $10. The research also showed that a third of SPACs that have merged saw a redemption of over 50 percent.

We’ve seen a new trend where stockholders have been opting for redemption while approving the merger. At times, we have got into a strange situation where most of the shares were redeemed, which left very little cash for the merger target. Locust Walk Acquisition Corp. (LWAC), which merged with eFFECTOR, is a good example. Specifically, 97 percent of SWAC stockholders opted for redemption, which led to a massive short squeeze. Shorts didn’t have shares available to cover their positions. The outstanding share count fell from 17 million to only about half a million.

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Has the SPAC bubble burst?

There were clear signs of a bubble in the SPAC market. To me, the biggest sign was the 550 percent rise in Churchill Capital IV (CCIV) stock on rumors that it will merge with Lucid Motors. It was a sign that investors were willing to pay any price for the next big thing. There was simply no way that the price level was sustainable unless Lucid Motors agreed to dirt-cheap valuations.

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Also, the kind of forecasts that companies provided at the time of SPAC mergers looked way too rosy. Many companies have had to lower the projections after the merger as reality starts to bite.

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The SPAC bubble has burst. However, SPACs are here to stay for good and give a tough fight to traditional IPOs. There's a lot on the table in a SPAC for all of the participants. While the sponsor gets a good payout through sponsor shares, the merger target can go public much sooner than the traditional IPO.

Investors have the “expertise” of an expert who can find the “next Tesla” or the “next 10x idea.” For now, forget the 10x idea because most SPACs are even finding it difficult to even hold onto the $10 stock price level.


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