With the tightening of monetary policies, speculative bubbles burst one after another. SPACs are no exception.
As a reminder, a SPAC, or Special Purpose Acquisition Company, is a company with no operational activity – an empty shell – which raises funds on the stock market for the sole purpose of carrying out one or more acquisitions.
It asks investors to sign a “blank check” with the promise to use the funds raised to acquire an unlisted company in return. Once the transaction is concluded, the SPAC takes on the name of the acquired company, which has access to the funds raised.
The stock is then traded on the stock exchange like any other listed security. SPACs are therefore “liquid” investment vehicles for obtaining “pre-IPO” shares in high-growth companies.
SPACs offer a major advantage for those aiming for a quick IPO: financial disclosure requirements are less stringent than for a traditional IPO.
“On the investor side, they have attracted billions of dollars from individuals and hedge funds looking for higher potential returns and risk, often associated with private markets,” according to Charles-Henry Monchau, chief investment officer at Syz Bank. .
Discuss the SPAC ecosystem with AM City Today, Monchau pointed out that the period of massive liquidity injections that was put in place in 2020-2021 in response to the Covid pandemic played a significant role in the exponential growth of SPACs.
“Indeed, these financial stocks have been around since the 1990s, but they’ve really exploded in popularity in 2020 and the first part of 2021,” he said.
In 2020, no less than 227 transactions worth $76 billion were recorded. The year 2021 was even more spectacular: according to Ernst & Young, a total of 646 SPAC transactions were recorded worldwide for a total issuance volume of $161 billion.
The SPAC boom is over
But the SPAC boom seems behind us. Indeed, the bubble is bursting, with research firm Audit Analytics reporting that at least 25 companies that merged with SPACs between 2020 and 2021 have issued liquidation warnings in recent months.
“These warnings mean that a company’s auditor has determined that there is ‘significant doubt’ about the company’s ability to survive the following year,” Monchau explained.
According to Audit Analytics, that’s double the number of warnings issued by listed companies in a traditional initial public offering (IPO).
Companies that went public via a SPAC are down an average of 60% since the date of issue. The Defiance Next Gen SPAC Derived ETF (SPAK) is down 45% from its June 2021 highs.
Many startups that went public through SPACs now find that their revenue projections at the time of fundraising were actually far too ambitious.
“The delay in business development leads to significant cash flow problems. This is especially true for many startups operating in the electric vehicle (EV) space,” Monchau said.
Electric vehicle sector
Electric Last Mile Solutions (ELMS: Nasdaq), an electric vehicle startup that went public in June 2021 through a merger with a SPAC, revealed late last month that it would run out of cash in here June.
In February, CEO James Taylor and Chairman Jason Luo, both co-founders, were ousted, effective immediately, following an internal investigation into stock purchases they made just before the company announces its IPO through a merger with a SPAC in December 2020.
Electric Last Mile is under investigation by the SEC. His listeners decided to throw in the towel in February.
“Since then, the company has not been able to hire a new audit firm and therefore has no one to audit financial reports it has not yet filed,” Monchau pointed out.
In addition, the company must perform a review of some of the quarterly reports it has already filed. At the end of May, ELMS stock price was down 94% from its peak in June 2021.
“At the rate the business is burning cash, the ELMS will likely be the first SPAC (in the current cycle) to drop to zero. But it may not be the last,” Monchau said.
Startup EV Canoo, which went public via a merger with a SPAC in December 2020, said in its first-quarter earnings call that it might not have enough cash to continue operating, adding that “there is significant doubt about the company’s ability to continue as an ongoing concern.
Monchau recalled that the company is now trying to raise funds by selling $300 million of new shares and issuing debt for the same amount.
The company is also under investigation by the SEC regarding its merger with SPAC and its “operations, business model, growth strategy, revenues, customer agreements and other related matters, as well as the recent departures of certain leaders of the company”.
“A boon for class action lawyers…Many executives have left the company, including the co-founders, CEO, CFO and COO. Canoo still hasn’t replaced its CFO and is using an interim CFO,” Monchau said.
At the end of March, Canoo still had $105 million in cash. According to his forecast, he expects to spend around $200 million in the second quarter without generating revenue.
“If Canoo were able to raise the aforementioned $600 million, the company would be able to extend its survival for another three quarters, through the end of 2022 and possibly into 2023,” Monchau said.
“But if Canoo is unable to generate revenue by then, the $600 million raised from investors will be gone and the company will have no choice but to file for bankruptcy.”
According to wolfstreet.com, Canoo does not appear to be able to produce a marketable vehicle anytime soon. The quarterly loss at the end of March was $125 million.
The company would need billions of dollars from investors – not a few hundred million – to accelerate its R&D program and produce its first vehicles.
“Without this ramp-up in development and production, the company has almost no chance of covering its operating expenses,” Monchau noted.
Canoo shares have fallen 84% from their highs. The issue of new shares will prove to be dilutive and should therefore not generate a rebound in the stock – at least in the short term.
In another example, Lordstown Motors [RIDE], which went public through a merger with SPAC in October 2020, also filed a “going concern” warning with the SEC. At the end of May, the stock was down 94% from its peak in February 2021.
Electric Last Mile, Canoo and Lordstown Motors are among 25 SPACs that have issued liquidation warnings. Three other electric vehicle companies have issued similar warnings.
“It looks like EV battery makers may soon add to that list,” Monchau said.
It should be noted that regulators are considering changing the rules on SPAC projections and bringing them closer to IPOs, he added.
“The U.S. Securities and Exchange Commission (SEC) has said it is considering proposing to limit legal protections that some SPACs have used in the past when reporting on companies they propose to make public.”
Monchau concluded: “These measures should limit the likelihood of a new speculative bubble in this segment when market conditions become more favorable.”