- Special purpose acquisition companies, or SPACs, have a limited pool of businesses to buy.
- And with more capital chasing startups, not all the deals will be good for retail investors.
- Now, some blank-check companies are getting creative in how they source acquisition targets.
- See more stories on Insider’s business page.
The glut of special purpose acquisition companies formed at the start of last year are now more than halfway into their searches for a business to buy. As the clock ticks down, some may be looking to settle for less-than-ideal mates.
In the last 16 months, more than 560 so-called blank-check companies have gone public, according to SPAC Insider data. An overwhelming majority of them, about 415 companies, are currently on the hunt for an acquisition. If the
doesn’t complete a merger, usually in a period of two years, it must return its funds to public shareholders.
The relatively crowded field and increased competition among them could spell bad news for the retail investors who are betting that they find good targets.
Josh Wolfe, a managing partner at Lux Capital, predicts that 10% of SPAC mergers will create “incredible, world-changing” companies that raise a lot of cash on the public markets. They will use the money to roll up their competitors and establish dominant market positions, he said. Lux raised $300 million for its own SPAC last fall.
But 90% of mergers will produce “what I’m calling craps, which are companies that are going to be very low-quality that sold renderings of the future to investors,” Wolfe said. “If they’re not fraudulent, they’re pretty close to it.”
He says “renderings of the future” because startups often use financial projections in their price negotiations with a SPAC, which is something they can’t do to justify a valuation when they go public through a traditional IPO. It’s the “main risk” associated with SPACs, Mike Murphy, managing partner of Rosecliff Ventures, told Insider in March.
Already, many blank-check companies that haven’t locked-in targets are trading below their $10 price on their first day of trading, research shows. Of the more than 100 SPACs that announced mergers this year, 90% have returns on those stocks that trail the S&P 500, according to a Reuters analysis of data from Refinitiv and research firm SPAC Research.
Even as blank-check companies swarm startups, many of them will prefer staying private, raising debt financing, or going public through the traditional routes, said Jennifer Post, managing partner and member of the Corporate and Securities law group at Thompson Coburn. They can avoid some of the pitfalls of “being public prematurely.”
Startups have to build the infrastructure to become compliant with certain regulatory standards, she said, and release tremendous amounts of information to the public at the risk of putting the company at a competitive disadvantage. The founders also give up control by adding certain types of people to their boards as required by the stock exchange.
“That core group of people who grew the company, invested in the company, and helped the company grow to a certain level, will to some degree be disbanded in connection with the SPAC acquisition,” Post said.
Stock Market Making it work
As interest from retail investors cools, some SPACs are thinking outside the box in how they source businesses to buy.
There are early signs that the people who organize the SPAC, known as sponsors, are downsizing their outfits so they can go after a wider set of startups. Last week, a blank-check company formed by Sam Altman, the former president of Y Combinator, and investor Michael Klein slashed how much it intended to raise to $400 million from $1 billion.
Some sponsors are shopping for targets overseas where they hope to find promising startups at lower prices, Insider’s April Joyner previously reported. SoftBank and Rocket Internet are among the firms that have rolled out SPACs focused on companies in Latin America. One recent overseas deal includes British used-car marketplace Cazoo, which said it plans to go public through a merger with investor Daniel Och’s blank-check company, at a $7 billion valuation.
For SPACs seeking targets, the well hasn’t completely dried up. Ninety-one SPACs announced acquisitions in the first quarter of this year, nearly as many as the 98 such deals made all of last year, according to an analysis by The Deal.
Mike Jones, managing director at venture firm and startup studio Science, Inc., said a number of the firm’s growth-stage portfolio companies are in talks with SPACs about merging. Overall, their reaction to SPACs is positive, he said.
The key to a successful combination, Jones said, is the “personality fit between founders and investors.”
Anytime a company is adding investors or board members, Jones’s advice is to “find the best partnership that will drive further growth in the value of the business and expand the expertise set for the executive team,” he said.
April Joyner contributed reporting to this story.
Are you a startups or venture-capital insider with insight to share? Contact Melia Russell via email at firstname.lastname@example.org or on Signal at (603) 913-3085. Open DMs on Twitter @meliarobin.
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