SPAC Mergers and Their Impact on the Market

Do IPO’s and public listings continue to go hand in hand? In recent years, SPACs (Special Purpose Acquisition Companies) have emerged as an alternative route, offering a faster, more streamlined way for companies to go public. SPAC mergers have positioned themselves as a dominant force in the M&A landscape, driving an uptick in public listings and significantly impacting market dynamics.

Why the rise of SPACs in public listings? SPACs, or “blank-check companies,” are formed with the sole purpose of raising capital through an IPO to acquire or merge with an existing private company, thus taking it public. According to an article from EY, “the targets’ valuation is agreed between the SPAC and target(s) and is then “validated” through equity funding commitments from investors in the form of PIPEs (private investments in public equity)” (Anani et al, 2021). This trend surged in 2020 and per an article from the Harvard Business Review, “$13 billion was invested in 2020, 247 SPACs were created, with $80 billion invested; and in the first quarter of 2021 alone, 295 were created, with $96 billion invested” (Bazerman et al, 2021).

The attractiveness of SPACs stems from their ability to bypass the lengthy IPO process, offer greater pricing certainty, and provide target companies with access to significant capital. In addition, as exemplified by Psyence Biomedical Ltd's public debut via a merger with Newcourt Acquisition Corp (Financial Post, 2024), SPACs are offering opportunities for companies in niche sectors, such as psychedelic medicine, to access public markets​.

A comparison between traditional IPOs versus SPACs highlights certain advantages that the latter can yield. A massive pro is timing – SPAC mergers can often complete the process within a few months compared to the average 6 to 12 months required for a traditional IPO. In general, the “SPAC IPO process is completed within three months, with fewer comments from Securities and Exchange Commission (SEC) staff” (Anani et al, 2021).  In addition, unlike IPOs, where pricing can be subject to market fluctuations and underwriter pricing models, SPAC mergers often involve negotiations that provide more pricing certainty for the target company. An important feature of SPACs, which render them so desirable, is the option for investors “to withdraw from a deal after the sponsor identifies a target and announces a proposed merger” (Bazerman et al, 2021). This means that if an investor isn’t on board with a deal they can opt out, redeeming their shares for cash invested, with interest. Lastly, SPACs are frequently backed by experienced industry veterans, offering the target company strategic guidance and market insights, as was seen in the Alset Capital-HWH International deal (Nasdaq, 2024).

If there seems to be a myriad of positives – why are SPACs not the norm? SPACs come with their own set of risks, including higher dilution rates and the pressure to identify a target within a specific timeframe, usually 18 to 24 months. SPAC deals often involve substantial sponsor fees and dilution, which can erode post-merger value if not carefully managed. On average, SPAC sponsors usually “own a 20 percent stake in the SPAC through founder shares or “promote,” as well as warrants to purchase more shares” (KPMG, 2021). In addition,  a couple days ago the SEC proposed a new set of rules to enhance disclosure around SPAC sponsors, target companies, and potential conflicts, signalling a shift toward greater scrutiny (Securities and Exchange Commission, 2024).

While, January 2024 has seen a resurgence of interest in SPACs with more established operating histories, particularly in sectors like technology, healthcare, and lifestyle, suggesting that investors are becoming more discerning in their SPAC investments. For example, the merger between TruGolf and Deep Medicine Acquisition Corp., a SPAC focused on tech and health innovation (Globe Newswire, 2024). The future of SPACs, however, may involve smaller deal sizes, more targeted industries, and greater transparency, aligning with the growing demand for responsible investment practices (Deloitte, 2024). In 2024 and beyond, SPACs are likely to continue playing a prominent role in the market, especially for companies in emerging and niche sectors. However, as regulatory scrutiny intensifies and investors demand more transparency and strategic alignment, SPACs may need to adapt by focusing on smaller, more targeted deals with clear value propositions.