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Smaller and newer companies face all sorts of challenges, some new and some old. The business concentration and almost monopolistic power of the digital giants is increasing. The cost of complying with many regulations is proportionally higher for them and they have less access to cheap public debt markets than their larger competitors.
This causes many companies to monitor equity markets for financing, but the initial public offering process can be lengthy and costly. Currently, responsible executives have another option: to merge with a Spac or a “special purpose acquisition company”. Proponents claim that these blank check vehicles offering the listing can offer a smarter, more reliable and faster way to enter public markets.
But yes? The Spacs, which are relevant companies that make public their promise to become real companies through mergers in two years, have had a recent history. In 2021, there have been 30% more Spac emissions than traditional IPOs. In fact, the number of state-owned enterprises has declined dramatically in recent years.
A OECD Report June looking at the capital markets, it was found that since 2005 more than 30,000 companies have withdrawn their listing. This equates to three-quarters of the current total number of listed companies worldwide. The number of new tokens has not come very close to matching. The result: fewer and fewer companies use public equity markets and the money raised goes to fewer larger companies.
Spac fans say the structure is helping to straighten the balance by making it easier for young companies to enter the market. These agreements have also been promoted as a kind of “poor man’s private capital,” allowing retail investors to support managers who orient and restructure firms in the same way as institutional investors.
Clearly a lot of people have been buying this story. In 2020 alone, Spacs raised as much money as they had done throughout the previous decade and by 2021 it has already done so. passed this total. This has led regulators and major investors to label the structure speculative and dangerous, the kind of financial “innovation” that characterizes a superior market.
Certainly, Spacs have some of the same characteristics (relative novelty, information asymmetry, moral hazard) as the good garbage that caused the eighties savings and loan crisis or the collateralized debt obligations involved in the crisis 2008 financial statement. “Because there is no precedent, they can take risks that are not easily recognized,” says Richard Bookstaber, director of risk at Fabric, a risk analysis and technology group. “This gives the innovator an edge over the market and regulators.”
This is clearly problematic. But even more important is whether or not Spacs keeps its promise of being a cheaper, more efficient, and more democratic way of making new businesses public.
A recent working paper from the European Corporate Governance Institute examined the 47 Spacs that merged with target companies between January 2019 and June 2020. It does not suggest. Although the academic authors found “no evidence that Spacs are fires of fraud or direct deception of investors,” they found that “the costs built into the Spac structure are subtle, opaque, and far higher than they had been.” previously recognized “.
The study’s Spacs issued shares for about $ 10 and investors valued them at the same amount at the time of the merger. But at the time, the median Spac of the study had only cash of $ 6.67 per share.
Indeed, these mass-consumption vehicles consumed a third of the cash they raised, or 50% of the money they eventually gave to the companies they made public. “These costs are much higher than those of IPOs, they are even underestimated, and are about twice as much as those even Spac skeptics have previously estimated,” the researchers noted.
In addition, the study also found that Spac stock prices tend to fall by about a third of their value in a year after their mergers. Since 2010, there has never been a year in which Spac’s mergers exceeded the Russell 2000 small-cap index. which dates back to 2013.
The ECGI study notes that Spacs sponsored by large private equity funds and former Fortune 500 executives tend to do better. But there are many with high-profile sponsors who have shut down, discrediting that the process offers a higher price and greater security compared to IPOs.
We can be thankful that the Spacs in the studio didn’t have them primarily retail investors. The large institutional managers accounted for 85% of the property and 70% of the total shares were held by a handful of investors, which the study called “Spac Mafia”. In fact, 15% of the total shares after the IPO has been in the hands of five investors.
It could be argued that this means we shouldn’t worry too much about Spac madness. If some wealthy investors lose their T-shirts, what happens? Unfortunately, dozens of these companies they have recently joined the Russell 3000 index, followed by investment vehicles with $ 9.1 trillion in assets. Spaces are suddenly much more common.
The U.S. Securities and Exchange Commission, which has a mandate to protect the little one, is already expressing its concern about Spacs. Since Spacs are structured to leave investors instead of sponsors who take on most of the risk, I can’t imagine a better target for regulators who want to limit moral hazard.
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