Where's the SPAC Attack?

Reuters reports that time is running out for the dozens of Special Purpose Acquisitions Companies (SPACs) that raised billions in IPOs nearly two years ago. The companies are usually obligated to consummate an acquisition within two years of the IPO or shareholders get their money back.

SPACS are caught between a dead IPO market and cash-hoarding hedge funds. While the credit crisis has cleared away competitors for prime acquisition targets, investors have blocked acquisitions by voting down one deal after another.

By the count of one banker, Benjamin Howe, chief executive of Boston-based boutique investment firm America's Growth Capital, 21 acquisition proposals were nixed by shareholders in 2008, while nine were given the OK. Of those, only two were approved in the second half of the year.

"In theory, it appears to be a perfect storm for SPACs," Gil Ottensoser, managing director at Deutsche Bank (DB), said, referring to abundant bargains.

"In reality, part of the challenge is that there is no IPO market, and public valuations in this environment can never be low enough," he said.

Cash-hungry hedge funds are also conspiring against SPAC success:

The SPACs' cash holdings give them an edge but could also be a double-edged sword as their cash-strapped investors, primarily hedge funds contending with unprecedented levels of redemptions by investors in 2008, want to recoup some cash.

"There are about 30 hedge funds that control the SPAC market, and they've been clobbered by the markets," said America's Growth Capital's Howe. The S&P 500 fell about 40 percent in 2008.

So is there hope for SPACs?

"When the IPO calendar comes back, and the buy side's appetite for risk returns, it's logical to believe that SPACs will be able to consummate good acquisitions as well," Ottensoser said.

Comments

[letsmakemoney:]

This is an interesting article, but I would suggest the author dig a bit deeper into what it means for current investors who buy publicly traded SPACs today. Would also suggest a list of them, and their current discounts to liquidation value. They are almost all trading at a risk/time discount to their redemption/liquidation value. If no deal is consummated, this discount will have closed, and the investor will have received the return associated with this time frame, and risk taken. It is somewhat analogous to risk arbitrage in terms of the way the spread trades.

Each SPAC is different, carries unique risks, and should be researched thoroughly before investing. As an example, you buy a SPAC at $9, no deal is announced over 12 months, you receive your liquidation value of $10. This $1 dollar equals an 11.1% annual return, just for waiting it out. This is an oversimplification, but it is more or less the reason hedge funds with longer time frame lock-ups are investing in these SPACS today, and they are likely applying 2-3x leverage to juice returns. They are in fact betting that no deals are announced, and that cash is returned to investors. Hedge fund are more or less capitalizing on this illiquidity premium associated with the SPAC. They are buying them from market participants with weaker long-term financing mechanisms.

Jan 04 11:17 PM

[hisabness:]

i'd also suggest the author call them special purpose acquisition companies and not special purchase acquisition companies.

Jan 05 04:21 AM

[L Boyd:]

Having worked extensively on a SPAC deal as an M&A I-banker, my advice to anyone considering a SPAC is to - RUN, don't walk. In theory, SPACs seem like a great opportunity. In practice, there are just too many moving parts, too many cooks in the kitchen - which is evident by the amount that have been successful in getting acquisitions approved by shareholders.

Jan 14 01:56 PM