Could 2022 be the year of the de-SPAC?

One issue the SPAC boom has recently raised is whether in the U.S. the de-SPACings (the closing of particular mergers between SPACs and their targets) are keeping up.

After all, if an exit doesn’t work, the entrance into a transactional tunnel quickly loses its utility.

Lami Ajibesin, managing director and practice leader, Anchin Transaction Advisory Services, emphasized in a recent discussion with Alternatives Watch that much due diligence is accomplished before the filing, and so before the official clock starts ticking. Once the SPAC is filed, though, there are typically two years in which to de-SPAC. And as Ajibesin put it, “two years can go by very quickly.”

Some investment banking analysts called 2020 “the year of the SPAC.” That was the year that a once fringe financial maneuver went mainstream: the listing of a special purpose acquisition vehicle, or “blank check company” with the mission of seeking out and merging with a private operational company.

The number of SPAC filings reached 251 in 2020, which was more than four times the number (59) of 2019.

But 2020 certainly wasn’t the last year of the SPAC. In 2021, after all, the number of filings hit 613.

At the moment, exits do not seem to be keeping up with IPOs. As noted above, 251 SPAC companies filed in 2020, and many of those have two years to de-SPAC.

They have now entered the calendar year in which they will have to have done that. According to one report, only 137 of them, about 54%, have completed deals. Another 33 (13%) have announced but have not completed.

An announcement of course does not guarantee a completion. In May 2021 Cayman Islands based SCVX announced that it would merge with a California robotics concern, Bright Machines. The deal valued Bright Machines at $1.1 billion with a post-transaction equity value of $1.6 billion. But on Dec. 13 the two firms terminated the transaction, citing no reason more specific than “market conditions.”

This leaves SCVX, which had an IPO date of Jan. 21, 2020 staring at a deadline of Jan. 28, 2022. 

The closer a SPAC is to the end of its life cycle, the more anxious it is naturally to consummate the de-SPACing transaction. Yet the management cannot afford to allow the anxiety to cut into its due diligence. A case in point: the Securities and Exchange Commission recently charged one SPAC, Stable Road Acquisition Corp. and its target, Momentous Inc., and the CEOs of each, with misleading claims and inadequate due diligence.

The parties (without admitting wrongdoing) consented to an order requiring them to cease and desist from future violations, and to pay civil penalties of $7 million for Momentus, $1 million for Stable Road, and $40,000 for Stable Road’s CEO, Brian Cabot.

The acquired company

Trainers counsel aspiring hunters to learn to ‘think like’ their prey. What kind of operational company might benefit by being a SPACs target? Answering this requires an understanding that once a transaction is agreed upon, the merger may be completed within two weeks, so the company has to be compliant with the rules and regulations of the SEC or ready to become compliant within those two weeks, by the moment it becomes a public concern.

This can involve, for example: preparing the disclosures required for the combined firm’s proxy/registration statement, finding sufficient independent directors to satisfy stock exchange requirements, designating an independent audit committee and compensation committee, and reworking board membership to satisfy diversity requirements.

Ajibesin said: “I won’t recommend a public listing for small or medium sized businesses due to the cost, numerous filings and regulatory requirements. Those are better served with other financing sources like M&A, private equity or other traditional routes. However, IPO/SPACs is still a solid route (not treacherous) for larger businesses with the right kind of governance and readiness for public company scrutiny.”

One notable success involved the fantasy sports betting firm DraftKings. The SPAC, Diamond Eagle Acquisition Corp., went public in March 2019. A little more than a year later, in April 2020, it merged with DraftKings and the combined company went public (NASDAQ: DKNG) with both DraftKings’ name and executive management. 

DraftKings was happy to go public in this way, with no road show, no photos on the stock exchange floor [and] no confetti because in spring 2020 the pandemic was new and startling and had introduced a new note of uncertainty. What was worse, there had been a string of highly hyped “unicorns” going public with graceless wobbles: Peloton (Sept. 2019), Slack (June 2019), even Uber (May 2019). Uber, the most highly anticipated IPO for months, had yielded the biggest first-day dollar loss in U.S. history.

Under the circumstances, then, Jason Robins, the CEO of DraftKings, was looking for a more under-the-radar launch, and he was happy to have Diamond Eagle offer him that.

Possible geographic shifts of the SPAC space

Will the SPAC trend, tunnel entrances and exits alike, move overseas in 2022? That is a possibility. Ajibesin of Anchin said: “As to how active SPAC space will be in 2022 it is too early to say. There is talk the SPAC as a trend is going to take hold in Europe and in emerging market nations, but so far this is chiefly talk.”

There were only 28 SPAC IPOs in Europe in the first three quarters of 2021.

Back in the United States: the boom could be set back by changes in monetary or regulatory policy. As to the former, Ajibesin said: “We are in an environment of low interest rates and increasing inflation. This has an impact on people’s investment decisions. But SPAC concerns are looking for sound startups, and they have a longer time horizon than the twists of monetary policy.”

The chief regulatory question at issue is one that applies to private vehicles in general: will the SEC demand greater transparency? And, if so, what will be the risks or costs for SPAC investors associated with the demand?