As SPAC Bubble Bursts, Local Sponsors Face Termination of Billion-Dollar Mergers
The bubble for special purpose acquisition companies has clearly burst, as deal flow slowed this year after a massive spike in 2020 and 2021. Serial sponsors of these blank check companies, commonly referred to as SPACs, are feeling the pain —not only having trouble finding targets for their vehicles but also seeing existing merger agreements being terminated.
Brad Shiffman, who leads the SPAC practice at Blank Rome, cited three main drivers for the increase in terminations.
The decline in economic conditions, the stock market and mergers and acquisition activity has led to stockholder redemptions increasing dramatically — in the 80% to 90% range. That’s important because investors are not getting cash out of the deal. In addition, private investment in public equity ("PIPE") deals for SPACs have become difficult, if not impossible to do. So sponsors cannot raise as much money.
SPAC mergers have two main purposes — to take a company public and raise capital — and Shiffman said without being able to raise capital, it really doesn’t make sense.
The third driver would be the decline in valuations, which are getting cut even after the deal gets signed in some instances.
“So you've got a combination of a company that's coming in expecting a high valuation, getting cut 30 to 40% and not getting financing in connection with it,” Shiffman said. “It's not as attractive to them.”
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"As SPAC Bubble Bursts, Local Sponsors Face Termination of Billion-Dollar Mergers," by Jeff Blumenthal was published in the Philadelphia Business Journal on August 24, 2022.