A Cautionary Tale: SPACs That Failed to Merge

Special purpose acquisition companies (SPACs) are all the rage in 2020. A SPACInsider report shares that 174 SPACs came into fruition in 2020, compared to just 59 in 2019 (and only one merger a decade prior). However, when a SPAC fails to merge, the stock plunges and any warrants are voided (though investors can usually redeem their shares). So what happens when SPACs never go through with their acquisition—and which SPACs have failed to merge? 

In April 2020, TGI Fridays terminated their SPAC merger with Allegro Merger. According to the deal's form 8-K with the SEC, the reason was "extraordinary market conditions and the failure to meet necessary closing conditions" during the COVID-19 pandemic.

Ultimately, this SPAC failure left TGI Fridays to deal with their own $350 million debt and make arrangements with existing investors who wanted to cash out. They have since received a government stimulus loan for assistance.

In 2019, CEC Entertainment (owner of Chuck E. Cheese and Peter Piper Pizza) failed to merge with Leo Holdings. CEC executives did not cite a particular reason for the termination, but they lost out on a deal worth $1.4 billion. The company has since filed for Chapter 11 bankruptcy.

The most unfortunate of SPACs that failed might just be Akazoo, an AI music streaming company that was supposed to merge with Modern Media Acquisition Corp in 2019. Instead, news came out that Akazoo's prior management had falsified the books and records to a serious degree, ultimately making their proclaimed 5.5 million subscribers a moot point.

Unsurprisingly, the Akazoo SPAC failed, and Modern Media's investors lost their backing.

Typically, SPACs offer $10 per share plus interest. The management of the deal has two years to find a company to acquire. If they don't find a suitable target, then they go into liquidation and begin the process of distributing its assets. Because the IPO funds are held in a trust, investors usually get to cash out their shares. If share prices go above the $10 rate (as we've seen this year with the SPAC boom) and a SPAC fails to complete, investors may suffer losses.

If a SPAC does find a suitable target but ultimately fails to merge with the company within the two-year time frame, they're still responsible for returning cash to investors.

So far in 2020, 112 SPACs have moved toward an IPO. Of these, the average valuation is $381.3 million. Most recently, we saw FS Development Corp go public on the Nasdaq Exchange on Aug. 11.

Earlier in the year, Greenrose Acquisition Corp, Collective Growth Corp, Therapeutics Acquisition Corp, and Malacca Straits Acquisition Company Ltd were among the many SPACs that achieved public status.

Perhaps the most public SPAC in recent times actually happened in Aug. 2019 with Virgin Galactic, a commercial space flight company owned by billionaire Richard Branson. In partnership with Social Capital Hedosophia Holdings—a SPAC run by venture capitalist Chamath Palihapitiya—Virgin Galactic handed over a 49 percent stake for $800 million.

Virgin Galactic stock has seen some stark increases recently, despite the fact that space tourism is still over the horizon.