(New York) The Special Purpose Acquisition Companies (SPAC), these financial vehicles allowing a company to go public through a merger, have experienced a marked slowdown since the beginning of the year on Wall Street after having seen their popularity explode in 2020 and 2021, a period of prosperity for markets.
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Empty shells without commercial activity, these Special Purpose Acquisition Companies already listed aim to raise funds and identify, within two years, a target company with which to merge.
According to Dealogic, only 67 SPACs were listed on the New York market between January and May, compared to a total of 861 over the previous two years.
And in the first five months of the year, 49 mergers with SPACs were recorded, a slower annual rate than in 2021 when there were 231.
What’s more, around twenty companies that had announced their IPO via a SPAC have given up since January, including the Forbes press group or the SeatGeek show ticket booking site.
Bad pass
SPACs have been present in US markets in one form or another since the 1980s, but it was during the pandemic that their numbers soared thanks to an ultra-favorable stock market environment and strong media hype.
Many celebrities, such as rapper Jay-Z, basketball legend Shaquille O’Neal or former US President Donald Trump, have associated their names with these companies.
But the bad patch that Wall Street is going through, galloping inflation and the tightening of access to credit have clearly dampened investors’ appetite.
“Money is flowing in less, people are stepping back. This is the classic pattern of a falling market that weighs on IPOs, “says Michael Stegemoller, professor of finance at Baylor University in Texas.
“What is a little perplexing is that the SPACs prided themselves on not being as vulnerable to this kind of situation as the traditional IPOs”, continues the academic.
A large part of the appeal of these financial vehicles was in fact due to the generally lower cost of procedures for entering the stock market and their less restrictive nature, particularly at the regulatory level.
Screw shot
But for several months, the American stock market policeman, the SEC, has toughened its tone, making proposals for more transparency and better protection for investors. Final rules could be adopted after a two-month consultation period, starting at the end of March.
Democratic Senator Elizabeth Warren, very involved in the fight against stock market speculation, for her part announced a bill aimed at regulating a sector which she accuses of being plagued by “fraud, insider trading and excessive costs”.
Legally, investors are suing SPACs for not registering as “investment firms” even though the money raised before the merger is placed in an escrow account that generates a return.
In the background, the stranglehold of SPAC leaders and the opacity in decision-making have eroded the confidence of the general public and investment funds while pushing some shareholders to fight back.
“Investors have said (to SPAC executives, editor’s note) ‘Wait, you’re giving yourself too big a slice of the pie, you have to give us more.’ “Describes Jay Ritter, professor at the University of Florida and specialist in IPOs.
“Market players have been pushing for change,” adds Ritter, who notes that SPACs now offer better financial guarantees to shareholders in the run-up to a potential merger.
Bankruptcy risks
The future of the sector remains uncertain. According to research firm Audit Analytics, nearly 11% of companies acquired by SPACs between January 2020 and December 2021 have issued bankruptcy warnings in recent months.
A total disappearance of these financial tools is however unlikely, according to Mr. Stegemoller.
“I think the market will shrink in the short term, it will be less dominant in the field of IPOs”, predicts the academic.
“Honestly, it’s probably a good thing,” he says, betting on fewer but better regulated SPACs, and therefore less dangerous for investors.