Why SPACS Are Flailing as Market Conditions Shift

June 02, 2022
Business

Although SPACs had been around for decades, they long had an unsavory reputation. Only companies whose financials wouldn’t survive investor scrutiny en route to a traditional initial public offering used SPACs to go public. That changed at the beginning of 2020, when prominent financial firms, venture capitalists and hot start-ups embraced SPACs as a faster and easier route to the public markets than an I.P.O.

Wall Street banks were only too eager to arrange these cookie-cutter deals for hefty fees. And investors desperate for returns enthusiastically bought in.

Suddenly, everyone from hedge fund managers like Bill Ackman to celebrities like Patrick Mahomes, the N.F.L. quarterback, and Serena Williams, the tennis legend, jumped on the SPAC bandwagon. Retail investors got involved, too, as stock trading took off during the pandemic. Even former President Donald J. Trump struck a deal with a SPAC last year to take his fledgling social media company public.

“Why did V.C.s turn to SPACs all of a sudden? Because reputable investment banks started underwriting them,” said Mike Stegemoller, a finance professor at Baylor University.

SPAC deals have been an important new source of revenue for Wall Street banks. Since the start of 2020, the top 10 banks arranging the public offerings of SPACs made just over $5.4 billion in fees, according to Dealogic. Citigroup, Credit Suisse and Goldman Sachs pocketed the biggest fees.

Companies that sell shares to the public through an I.P.O. have to undergo a rigorous process with strict rules. But SPACs face few regulations, since the companies going public have no actual operations yet. The shares are usually priced at $10 apiece.

Early investors also get warrants, a type of security that gives them the right to buy additional shares later at a predetermined price. If shares of a SPAC go up after it finds a merger partner, warrants can be financially rewarding.

Article source: https://www.nytimes.com/2022/06/02/business/spacs-inflation-regulation.html