SPAC Deals Decline as Interest Fades

Some of Wall Street's most speculative investors are scaling back their ambitions, doing deals that are a fraction of the size of their previous acquisitions. This shift comes as the market shows signs of cooling off after years of record-breaking growth.

‍
SPAC creators are valuing companies they seek to take public at the lowest levels since the boom began nearly three years ago, according to Dealogic. The average announced SPAC merger value has fallen to about $200 million so far in January, down from more than $2 billion during the sector’s peak.
"The market is changing and investors are becoming more interested in stable companies rather than high-risk, high-reward ventures," said Brian Dobson, a senior research analyst at investment bank Chardan. "This shift in sentiment is reflected in the performance of these two stocks."

‍
The market for traditional initial public offerings has all but dried up due to higher interest rates and a weakening economy.
SPACs have been increasingly popular in recent years, especially among buzzy startups. In 2019, SPACs trumpeted deals worth several billion dollars for SoFi Technologies Inc. and Lucid Group Inc., two very popular startups. This created a lot of social media and television buzz.

‍
Now, they are quietly unveiling tiny mergers for everything from a balloon-sensor company to an Indonesian financial-technology company, sometimes without even issuing a press release. These companies are pitching themselves as alternatives to satellites and traditional financial institutions, respectively. By quietly acquiring these companies, the tech giant is signaling its interest in these emerging industries.

‍
"The highs were extremely high, so the crash is correspondingly low," said Kristi Marvin, founder of data and research provider SPACInsider.
This shift represents a return to the origins of the SPAC market. Blind pools, which were predecessors to today's SPACs, were associated with penny-stock fraud in the 1980s. These blank-check firms were known for risky deals involving companies that wouldn't have been able to go public through more highly regulated IPOs.
SPACs have become more competitive and mainstream due to improvements to the SPAC structure and stronger disclosures. However, some analysts say that SPACs are once again merging with high-risk companies that don’t meet the typical requirements for becoming publicly traded.

‍
This month, several biotech companies and a carbon-emissions tracking upstart have announced deals.
A company that had already gone public through a SPAC said it would attempt to combine with another blank-check company to raise more cash, in a particularly quirky deal. It is one of the first times a company has attempted to merge with multiple SPACs.

‍
Wejo Group Ltd., a vehicle-data company backed by General Motors Co. and software firm Palantir Technologies Inc., said recently that it is hoping to raise as much as $100 million by combining with a second SPAC. Wejo has been running out of money after raising less cash than it had originally expected from its SPAC deal in 2021.
Wejo and many other startups that have gone public in recent years have seen their stock prices fall by around 80%. This has put pressure on them to find new sources of funding to stay afloat.

‍
John Maxwell, Wejo's chief financial officer, said that the company evaluated a number of different options for raising money before deciding that another SPAC transaction with a unique structure was the best option.

‍
A SPAC is a shell company that raises money from investors and lists on a stock exchange with the sole intent of combining with another company. In most cases, it is a private company that aims to go public. After regulators approve the deal, the company going public replaces the SPAC in the stock market.
Investors are allowed to pull their money out of a SPAC before a merger is completed, because they don't know what type of deal the SPAC will do. During the boom two years ago, such withdrawals were rare because shares of the companies were surging. Investors elected to either hold shares of the newly public startup or sell to lock in a profit.

‍
Now that the market is struggling, most investors are withdrawing their money, leaving the company going public with less cash to grow its business. This makes mergers less appealing.

‍
SPACs typically have a two-year window to do a deal, after which they must return cash to investors and the creators forfeit the money they spent to set up the SPAC, normally around $10 million. More of those liquidations have occurred in recent weeks than at any other time in the market's history, fueling losses for creators above $1 billion.

‍
Some analysts expect the trend of more muted mergers to continue because creators can make millions if they complete a deal.
"Everyone is just trying to stay afloat," said Benjamin Kwasnick, founder of data provider SPAC Research.