Spring 2022 Flash SPAC Update: Zombie SPACs Walk the Land In Search of Healthy Companies…
Sponsors and Wall Street closed 185 SPAC-led acquisitions for $444B over the last two years. These same companies are currently trading at $275B in value. There are roughly twice that many tech SPACs – 369 to be specific – currently looking for their acquisition with $96B in IPO proceeds. At the same time, there were only four announced SPAC acquisitions in April with a combined value of $4.8B. Three of those four acquisitions had zero or no disclosed revenues, and only one had a minimum cash requirement as a condition to close. These pre-revenue companies could theoretically enter the public market with de minimis cash reserves, so who knows what is real and what is not real there. At that rate of four announced deals per month, it will take eight years to get through the backlog of the SPAC pileup. The problem is that $75B of that $96B in SPAC dry powder comes due in the next year as mandated by the two-year life of the SPAC charter.
Here we are with a tech market a bit beat up from the falling public stock market, a slowing economy, and clearly a bit of post-COVID-bubble hangover, yet we have $1.4T of PE dry powder along with their 4,000 portcos and strategics in search of new technology, new markets and growth. So, with this powerful PE and strategic backing, the tech M&A engine will continue to power on in 2022, but a little slower than the record COVID pace and at lower valuations than we have been experiencing for the last 24 months.
SPACs could play a healthy part in this M&A activity of 2022 if they: i. Back healthy companies that are public ready; ii. Negotiate deal values that are sound and will pop post-announcement, and; iii. Clean up the cap structure by giving up both the sponsor and public warrants and half the sponsor promote. The public IPO investors won’t love that, but their alternative is to wait for another year or more to get their capital back at the time of liquidation, so the carrot is just time value of money. Sponsors won’t love it either, but all that sponsor promote and warrant dilution is way too expensive for a good, clean company looking to be public. Their alternative is to do a bad deal or liquidate the SPAC at the end of two years.