(BFM Bourse) – At least 21 ex-Spacs who acquired the company have gone bankrupt this year, according to a count carried out by the Bloomberg news agency. Which, compared to the market cap of each of these companies, wipes out more than $46 billion in total capitalization.
After the booze, it’s time for a (severe) hangover for the Spac (“special acquisitions company”), those “blank check” companies.
Remember that these investment vehicles are created without any activity and are listed on the stock exchange to raise funds with the aim of then acquiring one or more companies. These operations allow the acquired companies to return to the stock market while benefiting from lighter regulation.
In a period of low or even negative rates, Spacs have seen real excitement, especially in 2021. According to consultancy Kroll, at least 613 Spacs were launched in 2021 with a total fundraising of $163 billion.
Unfortunately, Spaca’s fad has already passed or even been buried. In 2022, the number of Spacs created drops to 86 for $13 billion in fundraising, according to Kroll. As for 2023, Spac creations fell 76% to just 17 in the first half alone, raising $2 billion in funding.
In particular, several companies that merged with Spacs went out of business this year. At least 21 ex-Spacs, which therefore bought one or more companies, went bankrupt in 2023, according to a count published Wednesday by Bloomberg. “Measured on the basis of their maximum market capitalization, these bankruptcies represent a loss of more than $46 billion in total equity value,” the agency explains.
>> Get access to our exclusive graphical analyzes and gain insight into the trading portfolio
The decline of Wework and electric vehicles
The most famous case remains the company specializing in shared workspaces Wework. The American group, which went public in 2021 through a merger with Spac BowX, already operating at a discount to its original ambitions, left Charybdis for Scylla, choked by its debt and high rents for its premises. as well as the widespread use of teleworking. The company, whose stock market peaked at around $9.4 billion, filed for bankruptcy protection in November.
In addition to Wework, this year’s ex-Spacs bankruptcies highlight another trend: the end of the stock market around electric vehicles. American electric pickup maker Lordstown Motors, which merged with Spac DiamondPeak Holdings in 2020, went bankrupt this summer after being abandoned by Chinese group Foxconn, which halted its investment in the group. Lordstown has barely delivered 18 vehicles to its customers and produced 56 vehicles since its inception. Incidentally, the company was under investigation by the SEC, the US stock market watchdog, after it was accused by Hindenburg Research, a very serious short seller, of lying about its orders… not Tesla, who wants to.
Proterra, a specialist in components for large electric vehicles (such as buses), merged with Spac ArcLight Clean Transition in 2021 before going bankrupt last August, citing the economic situation. However, Sweden’s Volvo bought the company in November 2023 for $210 million.
The interest rate increases
As for the cascading bankruptcies of ex-Spacs that have acquired targets, Bloomberg notes that the acquired companies have tended to provide much more optimistic projections than they would in a classic IPO process.
Quoted by Bloomberg, Usha Rodrigues, a law professor at the University of Georgia, believes the hype generated by “meme stocks” and the promise of high valuations has encouraged private companies to pursue mergers with Spacs at a rapid pace. The result was a glut of Spas that Usha Rodrigues describes as a “time bomb” of corporate bankruptcies that materialized in 2023.
The deflation of the bubble in terms of Spac creations can be explained by a set of elements, especially the tightening of the screws in terms of regulation that occurred in 2022. The SEC then imposed more regulations on its well-known companies (and perhaps praised ) for their lack of transparency. “Soon after, the Wall Street giants began to distance themselves from operations involving (these) blank check companies, and the Spac reservoir dried up,” notes Bloomberg.
The end of this enthusiasm could also be influenced by the rise in interest rates, which made financial operations more expensive and thus easier, and at the same time weakened the balance sheets of companies.
Note that if the SPAC does not find a buyback target at an attractive price within a few dozen months (for example, 24 months), the money raised will be returned to the investors. In a low or even negative rate environment, this is not a big problem from a risk perspective. However, rising interest rates have completely changed the situation. “Today, in order to attract investors, promoters (Spac, editor’s note) offer additional guarantees, according to which, in case of failure of the operation, they will return up to 2% more than the original amount,” EY underlined last year.
In addition, two well-known European SPACs had to close down this year due to a lack of acquisitions. Pegasus Europe, the biggest Spac on the old continent, was liquidated in the spring and returned its money to investors after two years of failing to find an interesting target. Accor’s Spac, Accor Acquisition Company, suffered the same fate in May when it pulled the curtain two years after raising 300 million euros, but without finding targets that matched its criteria.
Julien Marion – ©2023 BFM Bourse