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February 23, 2022

SPAC mania shows signs of abating

One of the most common non-traditional routes for an IPO (initial public offering) is a merger agreement with a special purpose acquisition company (SPAC). However, after a generally strong 2021, this route is now losing its allure—and four SPAC mergers have already been called off in the first six weeks of 2022. For instance, the M3-Brigade Acquisition and Syniverse Technologies deal; the Acorns Grow and Pioneer deal; and the Kin Insurance and Omnichannel Acquisition deal have all been terminated in 2022.

SPACs refer to shell corporations designed with the single goal of taking companies public, without going through the traditional IPO process. This gained increasing popularity among private companies and acted as a shortcut to listing and raising funds through IPOs. This is similar to an old M&A practice that emerged a decade ago, known as a reverse merger. Just as reverse mergers did not last long, SPAC deals are expected to inevitably fade away, with negative media sentiment and increased regulatory scrutiny ahead.

A merger agreement with a vehicle SPAC is an easier and faster alternative to the traditional IPO process, and as a result of which there was a huge surge in SPAC deals from 2020 to 2021—especially for TMT companies. 2021 was a record-breaking year for SPAC vehicle deals, with at least 117 TMT companies combining with SPACs to go public, raising a total of $67.1 billion. Compared to 2020, the number increased four-fold. The three biggest SPAC mergers IPOs in 2021 were Lucid Motors (raising $4.6 billion), Grab (raising $4.5 billion), and SoFi (raising $2.4 billion).

Popularity is likely to cool soon

According to the GlobalData deals database, among all the deals with a deal equal to or more than $50 million, there were 91 SPAC mergers announced in 2021, compared to just 43 in 2020—a 112% increase. Of the 91 SPAC deals announced in 2021, eight were terminated, including some high-profile deals, such as the Pathfinder Acquisition merger with ServiceMax that was expected to raise at least $1.4 billion. Other companies that called off their IPOs were Bright Machines, PlusAI, Valo Health, and Apex Fintech Solutions. This trend in cancellations has increased throughout the second half of 2021. On top of this, some announced deals have been slowed down or delayed into 2022 and beyond—a sign that these might fall through as well.

For example, Circle, a cryptocurrency company, delayed its IPO and renegotiated its original agreement with SPAC Concord Acquisition, which had aimed to double Circle’s enterprise value from $4.5 billion to $9 billion. Similarly, Essentium, a 3D printing company, initially delayed its IPO via SPAC and eventually withdrew the merger agreement. This trend among companies is due in part to market volatility and inflation fears. Hear.com and Enact Holdings, which delayed their IPOs, cited concerns due to these reasons. Nikola, an electric truck startup, was accused of fraud by short-sellers, resulting in the resignation of its founder and an outbreak of lawsuits by shareholders just three months after going public, which saw its stock price fall by as much as 10%.

However, all these terminations will not make the booming market stop completely. Indeed, changing market conditions have actually given more power to private companies to choose from more than 570 SPACs that are currently seeking target companies to take public, according to SPAC Analytics. And the more options there are, the more chances for target companies to abort a deal if they get a better offer. For instance, Byju’s, the world’s biggest edtech company, is planning to merge with a SPAC and is in talks with at least four different SPACs as it explores a potential US listing. Ultimately, the SPAC merger is likely here to stay for now—though we are unlikely to witness the levels of activity seen in 2021.