The Special Problems that Come with Special Purpose Acquisition Companies
September 8, 2023
In recent years, the Special Purpose Acquisition Company (SPAC) saw its rise to prominence, and now investors are paying the price. Sold as a more efficient way to take companies public, SPACs essentially operate as publicly traded blank check companies that look to merge with a private company looking to go public. Through such a process, the traditional IPO process can be circumvented, meaning less business for underwriters like Goldman Sachs, JP Morgan, and Morgan Stanley. While underwriters may have been criticized for raking in large sums for themselves, their necessity seems validated by the dangers SPACs have shown themselves to pose.
In a SPAC frenzy, markets saw the pollution of numerous SPACs quickly list themselves in order to take part. The problem is, however, that the number of quality companies there are to merge with eventually dwindles, but SPACs still need to find target companies to satisfy investors. Here is where problems arise. In a Bloomberg piece on the bankruptcies of SPACs, authors Bailey Lipschultz and Jeremy Hill cite Quanergy Systems, Fast Radius, and Enjoy Technology as three companies that went public via SPACs and ended up filing for bankruptcy within a year.
Not all SPACs have been failures, however. Look to bowling establishment operator Bowlero Corporation, for instance. The largest operator for ten-pin bowling in the world, the company’s stock (BOWL) is, as of the market’s close on September 8th, trading above the initial $10 per share SPAC price but not by much.
Regardless, S&P Global data indicates the decline in SPACs, unsurprising considering the risks they have shown themselves to possess. In 2021, 610 SPACs IPOed, while in 2022, that number shrunk to 86. The data on the amount of money SPACs raised in 2021 compared to 2022 is also incredibly significant, with the number shrinking from over $160 billion in 2021 to less than $13.5 billion in 2022.
In recent years, SPACs saw a spike in popularity, with large volumes hitting the arena in sums that reached well over the $100 billion mark in 2021. The boom appears over, with numbers down significantly from 2021, and with good reason. Many companies that went public via SPACs have failed or are trading well below their initial $10 per share prices (see NCNC and CELU). Although, that is not the case for all, like with Bowlero. Corporations looking to go public in the future will have to determine whether the traditional IPO route is still the right path forward, but if the decline in new SPACs is any indication, they already have.