As fun as it is right now, we know the SPAC madness is going to end. The only questions are when, and who will be left holding the bag. 

“When” is hard to answer, but it’s becoming increasingly clear who’s going to be stuck with the bill when this party is finally over. SPAC sponsors will for the most part be fine, and probably better off for their adventures. Initial investors who hold on to their shares through a merger, or redeem them if no deal happens aren’t likely to end up worse for wear. However, secondary investors could be in for a gut punch.

“Who’s going to get hurt are people speculating on a deal getting done, and bidding up the price,” Brad L. Shiffman, a deal lawyer with BlankRome, told me in a phone call last week.

That was exactly what happened on Feb. 24 with Churchill Capital IV after it merged with electric vehicle maker Lucid Motors. Eager buyers drove the stock to nearly $65 a share following reports of a merger, but that was far too high  given the value of the deal. Shares quickly tumbled and were trading at about $29 this morning. It’s a cautionary tale that could be a harbinger of messy SPAC deal aftermath to come. 

Like sponsors, M&A lawyers have an interest in seeing frantic enthusiasm for SPACs continue. Much paperwork is involved in setting up these arrangements, and there is a lot of fee income to be made. But even attorneys specializing in this sector acknowledge that the gravy train won't keep speeding along forever.

“SPACs have had a very good run for a year,” Douglas Ellenoff, of boutique corporate transaction firm Ellenoff Grossman & Schole LLP, replied when I asked him recently if the SPAC fuse might be on its way to burning out. “It’s entirely possible it could slow.”

Both Shiffman and Ellenoff have been in the SPAC business since way before the investment vehicles were hip, long enough to have a firm handle on the trends. I first talked to both of them in September 2009, for an article I wrote about challenges in SPACs following the Great Recession. 

The vehicles were created by investment banker David Nussbaum and lawyer David Miller in 1993, according to the Wall Street Journal. Founders see them as a disruptive alternative to traditional IPOs, enhancing their popularity of late.

Looking back on the 2008 crash is instructive for understanding what could happen when SPACs eventually lose momentum, Shiffman explained to me over the phone last week. There is some built-in mitigation of downside risk in the event things don't work out as planned.

“What happens is the money gets returned if the SPAC can’t get its business deal done,” he said. “It’s a great protection for investors.”

Once an obscure, back-door trick to take businesses public, special purpose acquisition companies, or SPACs, have become the hottest thing on Wall Street over the past year, expanding well beyond sophisticated players in the space like Chamath Palihapitiya and Bill Ackman. 

Now over the past  year blank check companies have sprung up in every major industry, and the craze has sucked in celebrities. Alex Rodriguez, Colin Kaepernick and Shaq (former basketball star Shaquille O’Neal) all have SPACs. Hip-hop artist Cassius Cuvée invested in SPACs and released an ode to them on YouTube called “SPAC dream.”

At least 399 SPACs have gone public since the beginning of 2020, Thinknum data shows. Now more than $120 billion is currently sitting in 382 vehicles, waiting to make deals, according to research firm SPAC Analytics.

Axios revealed recently that CNN President Jeff Zucker had joined the board of a media-focused SPAC. Twitter users joked after Oprah’s bombshell interview with Prince Harry and Meghan Markle that the couple would announce a SPAC. Southeast Asian ride-hailing startup Grab Holdings is reportedly in talks to go public through SPAC, as is Richard Branson's Virgin Orbit

The trouble is that while the river of money flowing into SPACs is still going strong, the number of quality acquisition targets isn’t so certain. SPAC sponsors are often incentivized to try to do deals even if the businesses they buy are less-than-stellar picks. Mix that with the buzz surrounding many SPACs, sending stock prices irrationally upward, and the end result could be a mood-killer.

Earlier this month, CNBC reported that its proprietary SPAC 50 index, tracking 50 of the largest pre-merger SPACs by market capitalization, dropped by more than 15%. Some SPACs, desperate to make a deal, have been buying companies that were not as attractive as investors had hoped, causing some to scramble to redeem their shares, according to CNBC.

Bloomberg meanwhile warned last week that SPACs are in bubble territory and likely to pop. The news organization highlighted one sci-fi-sounding startup called Archer Aviation, which has a plan to replace Uber rides with trips on helicopter-like vehicles. Although it doesn’t yet have pilots or passengers, the company went public through a deal with a SPAC. Although it was valued in a seed funding round last April at $16 million, the SPAC deal put it at $3.8 billion, according to Bloomberg.

Some market participants are publicly wondering if SPACs will start to peter out if there aren't enough good deal prospects and success stories to fuel them. The rise of direct listings, for instance, is now offering companies yet another alternative path for going public.

“Serious questions, do you think we have enough entrepreneurs to deploy all of this capital?” Boulder, Colorado-based startup founder and investor Julie Fredrickson tweeted in February in reference to SPACs. “Like literally are there enough companies to buy?”

About the Data:

Thinknum tracks companies using the information they post online, jobs, social and web traffic, product sales, and app ratings, and creates data sets that measure factors like hiring, revenue, and foot traffic. Data sets may not be fully comprehensive (they only account for what is available on the web), but they can be used to gauge performance factors like staffing and sales.

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