How to Invest in a SPAC Successfully — Timing Is Everything

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Mar. 24 2022, Updated 8:22 a.m. ET

SPACs or blank-check companies came into the limelight in 2020. The total number of issuances topped the total of the previous 10 years. The SPAC mania continued in 2021 and the number of SPAC IPOs hit another record.

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However, the SPAC bubble has since burst, and most SPACs as well as de-SPACs, the companies that have merged with their targets, trade below the IPO price. This includes the SPACs from well-known sponsors like Bill Ackman and Chamath Palihapitiya, who earned the nickname “king of SPACs” for the multiple SPACs that he launched. While the SPAC bubble might have burst, you can still make some money in them if invested at the right time. When should you invest in a SPAC and when is it best to avoid the blank-check companies?

What's the lifecycle of SPACs?

First, let’s understand the lifecycle of a SPAC. As the first step, the SPAC sponsor files for an IPO where the price is typically set at $10. From the IPO to the time when the SPAC identifies the merger target, the SPAC stock is a play on the sponsor’s credibility and ability to find an attractively valued merger target.

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The second key timeline for the SPAC is when it identifies the merger target. It's followed by a stockholder vote where investors vote on the business combination. Finally, we have the merger date where the SPAC and the merger target start trading as a combined entity.

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Should you invest in SPAC IPOs?

The general convention is to price SPAC IPOs at $10 even though Bill Ackman priced his SPAC at $20 per share. During the peak of the SPAC mania, it made sense to invest in IPOs of SPACs sponsored by reputable sponsors with a good track record. However, with most SPACs now trading below the IPO price, it doesn't make much sense to buy a SPAC in an IPO.

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When should you buy a SPAC?

If a SPAC falls below $10 after the IPO, it could be worth a look. Also, if the SPAC falls sharply after the merger announcement, it might be worthwhile buying it. It's worth noting that SPAC investors always have the option to redeem their units when the merger voting takes place.

So, if a SPAC that priced the IPO at $10, falls to $8 after the merger announcement, you can consider buying the stock. Even if you also share the markets’ pessimism over the merger target, you can always redeem the units during the merger vote at $10 and make a cool profit.

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SPACs spike during the merger vote.

Invariably, SPACs have seen upwards price action when the merger is approved by the stockholders. Also, there have been multiple instances where SPACs have spiked if the merger is approved with massive redemptions. So, if a SPAC is heading into the merger vote with high short interest, it might be worth a look in anticipation of a short squeeze.

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When isn't a good time to buy a SPAC?

If a SPAC is trading at a significant premium over its IPO price before the merger announcement, you can give it a miss. Also, it might be prudent to stay clear of a SPAC ahead of the first post-merger earnings release. Many de-SPACs have tumbled following their earnings release because they failed to live up to the hype that they generated during the merger process.

Also, if a SPAC sees frenzied buying after the merger announcement, an event that's becoming rarer by the day unless the SPAC is associated with former President Donald Trump, risk-averse investors can steer clear of them.

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