The Death Knell Sounds for SPACs

Special purpose acquisition companies (SPACs) impose costs that are subtle, opaque and poorly understood. New research shows just how much SPAC investors stand to lose.

SPACs are companies without commercial operations yet raise funds through initial public offerings (IPOs) for the sole purpose of merging with a private target company within a limited period of time. In 2020, SPACs set a record of 248 IPOs and $83.4 billion raised in the U.S., only to be eclipsed in 2021 with 613 IPOs raising $162.5 billion, according to SPAC Research.

As was shown in this article, SPACs are created because they are lucrative for their sponsors and for investors who buy units in SPAC IPOs and sell or redeem their shares prior to SPACs completing their mergers. Nearly 100% of investors (dominated by a group of hedge funds called the “SPAC Mafia”) who buy into SPAC IPOs pursue such a strategy. Unfortunately, those gains come at the expense of non-redeeming SPAC shareholders (typically retail investors) and those who buy SPAC shares in the secondary market.

The findings from empirical research, such as the 2021 studies SPACS, A Sober Look at SPACs and JPMorgan’s examination of SPAC returns, have found that costs built into the SPAC structure are subtle, opaque and far higher than has been generally recognized, leading to poor returns to investors. In contrast, the sponsors reap huge returns due to the incentives built into the structure (the equity and warrants received for putting the SPAC together).

In fact, there has never been a year in which SPAC mergers outperformed the Russell 2000.

New research

Florian Kiesel, Nico Klingelhöfer, Dirk Schiereck and Silvio Vismara, authors of the study, SPAC Merger Announcement Returns and Subsequent Performance, published in the March 2023 issue of European Financial Management, constructed a dataset of 236 de-SPACs (those SPACs that had undergone a merger) announced in the U.S. between January 2012 and June 2021 for which a merger was consummated by July 1, 2021. They first investigated post‐merger announcement performance in the short term, using the period around the day a SPAC announced a business combination target to gauge stock market response. They then calculated the buy‐and‐hold abnormal returns (BHARs) of these SPACs over six to 24 months from the announcement day and from the de-SPAC date to examine long‐term performance. Following is a summary of their key findings: