With turmoil reigning across globally equity markets, you’d be hard pressed to find a corner of the market where sentiment has turned as dramatically as for special purpose acquisition companies or Spacs.
Spacs, where companies raise money in an initial public offering (IPO) to buy a trading company, have been in and out of favour under different guises – with names like “blank cheque” or “cash shell” companies – for decades. But the Spac craze on Wall Street in recent years was the hottest yet. About $245 billion (€238bn) was raised in such IPOs in New York between 2020 and 2021 amid ultra-low interest rates and surging equity markets.
As Spac IPOs face fewer regulatory hurdles than those of trading businesses, merging with such entities has been a popular backdoor way for companies to go public.
Spacs usually have 18-24 months to seal a deal – triggering lucrative benefits for their initial promoters, ranging from Wall Street grandees to celebrities and sports star – or face having to wind themselves up and hand their remaining cash back to shareholders.
The problem is that with money burning holes in pockets of Spacs some of the acquisitions have been questionable at best. The De-Spac ETF, an exchange traded fund that tracks the performance of 25 US companies that have floated as a result of mergers with Spacs, has plunged by 67 per cent so far this year. By contrast, the S&P 500 has fallen by 20 per cent, while the tech-rich Nasdaq Composite has lost almost 30 per cent.
North Atlantic Acquisition Corporation (NAAC), a US Spac founded by Irish packaging industry veteran Patrick Doran and corporate financier Gary Quin, seemed to have found something of a gem last December when it agreed to merge with TeleSign, a digital ID identification company owned by Belgian mobile phone group Proximus.
The fast-growing company, whose technology is used from logging into TikTok to resetting passwords for Alibaba, has forecast that its revenue will soar from $391 million last year to $1.1 billion in 2026. However, the deal was called off late last week in light of market volatility – joining a growing list of abandoned Spac mergers. Doran and Quin have vowed to find another deal. Time isn’t exactly on their side – with its 24-month window closing in January.
With around 600 other Spacs also on the hunt, the risks are mounting.