Stefano is Founder of MergersCorp M&A International, Investment Banker and M&A Advisor with 15+ years international experience.
A special purpose acquisition company (SPAC) is a blank check company that is formed and listed in the public markets specifically to acquire other companies. Overall, I and others, even with stricter laws since their formation in the ’80s, have found the laws surrounding the use, ownership and management of SPACs to be inadequate with a great possibility for misuse. What is currently more pressing concerning SPACS, though, is the many shell corporations that face liquidation as deal deadlines loom.
The year 2021 saw the highest number of SPACS formed. This is the post-Covid period when businesses were recovering from the effects of the pandemic. Over 700 SPACs were created in 2021, but only 467 acquisitions were completed during the year. This meant that there were hundreds of other blank check companies that were formed and listed in 2021 that did not have any transactions. In addition to that, other SPACs were formed in 2022, but they have not had any action.
Private Ownership During Market Downturn
While many business owners looked forward to taking their companies public in the past couple of years, many things have changed. For starters, the Fed hiked interest rates and inflation is now high.
When inflation and interest rates are low, the public markets are usually attractive, and this is when private companies tend to go public in order to take advantage of a booming market. This is what led to the formation of hundreds of SPACs in 2020 and 2021.
On the other hand, geopolitical concerns, high-interest rates and high inflation usually lead to depressed public markets. Taking a company public when these conditions persist can lead to the undervaluation of a private business.
As a result, many business owners no longer want to take their companies public as private ownership is favorable to them at the moment. This is the main reason I see SPACs having a difficult time closing deals and overall generating less interest in 2023.
The SPAC Lifespan
According to SEC rules, SPACs have a lifespan of two years. If a special purpose acquisition company is created but is unable to close the deal with the target company within two years, the SPAC has to be liquidated. The majority of SPACs currently in existence were established in 2021. Two years on, hundreds of these blank check companies have been unable to close deals and look to soon be liquidated.
Extension Of Liquidation Deadline
It is important to note, however, that the deadline for liquidation can also be extended to three years in some special cases. This means that SPACs that were created in 2020 and had their deadline for liquidation extended in the year 2022 have until the end of 2023 to close the deal with their target or wind down.
A Waiting Game
As mentioned before, these SPACs are likely waiting for the markets to take an upward turn. It is not easy to predict exactly when the changes occur. While many investors and economists are upbeat about the prospects of an upward turn in the market, it is difficult to predict when this will happen. It may take a few months, a year or several years.
Whatever it takes, SPACs are running out of time in waiting out unfavorable market conditions.
The Make Or Break Year For SPACs
I see 2023 as the make-or-break year for special-purpose acquisition companies. If they are unable to merge or acquire their target company, they will have to liquidate. Missing a deadline can also be blamed on other factors aside from economic conditions. After all, if the SPAC is offering inconvenient terms and conditions for the merger or acquisition, the deal is likely to collapse.
Whatever the reason, special-purpose acquisition companies have only a few months to make successful mergers or acquisitions with private entities. Liquidating will be a huge disappointment for the investors who had the SPAC formed and can cost them millions.
From the explosion of SPACs and the looming liquidations, here are my main takeaways for avoiding this situation in the future:
• Look for more targets.
• Always have a plan B.
• Study other SPACs and avoid making the same mistakes.
• Create a roadmap/plan for the whole SPAC journey.
• Avoid liquidation but do not rush into any quick decisions.
Of these points, the most important part is to have a clear action plan in place. As has been witnessed with past SPACs liquidating, it can become a very intensive process and a proper plan, including a plan B, is the main component that can help prevent delays and critical situations like the ones we are witnessing.
As a part of this plan, you want to have all communication channels open, not only with potential target companies but also with investment bankers, M&A advisors and consultants. This can help you keep a large pool of options available and even help you accrue enough deals to try to close before liquidation.
Recent SPAC Combinations
It is important to note that while some SPACs have managed to recently close deals with their targets, I don’t think many of the results have been impressive. This is because the public markets are depressed, so the valuations of private companies that have gone public through the SPAC route have been overall depressed.
When going public, it is usually expected that the valuation of the company will significantly go up. When the value of a company reduces shortly after listing, investors are never happy. While I am certain that the public markets will overall recover with valuations restored, many private investors are currently not willing to take the risk. For now, much of the market remains watching and waiting.
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