How Spacs are luring investors despite waning market interest
Some approaches used by Spacs include offering bonus stock to investors who choose not to redeem shares
Special purpose acquisition companies (Spacs) are turning to costly new tactics to keep investors from jumping ship as market confidence wanes in the once red-hot alternative to IPOs.
Blank-cheque acquisition firms and the companies they acquire are having to hand over bigger stakes in the ventures to investors in some cases, often at big discounts. Deal managers are also seeking backstop financing from investment companies and ploughing in more of their own cash.
Less than three months into 2022, 13 mergers involving Spacs have already fallen through in the US, according to data from industry tracker Spac Research. That compares with a total of 18 in the whole of 2021.
In money terms, almost $9.5 billion worth of mergers have been canned this year, according to Dealogic data.
The main cause of deals being abandoned, market players say, is the risk of redemptions — where investors exercise their right to sell shares in the venture back to the Spac before the merger is completed, and for the price they paid for them.
“Every transaction is worried about redemptions and every transaction is trying to figure out how to mitigate it,” said Amir Emami, global co-head of Spac coverage at RBC Capital Markets.
The approaches employed by Spacs include offering bonus stock to investors who choose not to redeem shares.
Spacs are shell companies that raise money in an initial public offering and put it in a trust for the purpose of merging with a private company and taking it public. Since investors are unaware of the target company ahead of the IPO, Spacs often grant them the right to redeem their initial investment as an incentive to put their money in the trust.
Yet significant redemptions undermine the viability of such deals. At the same time, shares of many companies that went public during the boom last year have fared poorly, leaving some investors nursing losses and making new Spacs look more risky.
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