Tech SPAC Tsunami Crashes the Shores of Global Technology
The Tech SPAC tsunami is about to crash the shores of the entire technology ecosystem. In just the last 6 months, 225 new Tech SPACs have emerged, with over 110 new Tech SPACs in the first 6 weeks of the year. In fact, on Friday alone, there were 27 SPAC IPO filings. The 32 Tech SPACs that have completed deals over the last year are up 86%, driving everyone to jump in, including established PE firms, celebrities, retired entrepreneurs, VC and PE veterans. We have an incredible wealth of company builders and deal makers in our global tech village, and the SPAC has blown open the doors for these tech warriors to bring our private companies to the public market, albeit earlier and generally in a more risky stage of development. The roughly 225 Tech SPACs looking for an acquisition typically have $300M in IPO cash and are leveraging up 7x on purchase price, generating $510B in acquisition fire power. This is 85% of last year’s total $600B tech M&A market. Like PE portcos, these 225 newly public small caps with big valuations and tons of cash will be out buying 1 to 3 companies each, driving much higher volumes in lower middle market tech M&A.
We can see the mass of deals coming our way and have at least a hint of how it will impact the tech landscape:
SPACs will be more formidable bidders for private companies, sparking deals that would have come later, driving up volumes, and dramatically increasing tech M&A activity until the music stops. Get it while the going’s good because 2022 may bring about a bit of a hangover from an unprecedented $5T of government stimulus in just 2 years and much higher capital gains and corporate income taxes.
PEs and Strategics will be challenged by SPACs, as new and powerful competitors steal away quality deals, driving up valuations. Why not consider doing a deal with a SPAC where the valuation could be 25%-50% higher without a likely 5 year lockup period?
PEs, having grown their current portfolios to as large as 60 companies, will benefit from this new exit vehicle. In some cases this will create a dilemma of holding out and going long or cashing in on the highest stock valuations and strongest institutional and retail demand for public companies in history. It wouldn’t be surprising to see some of these PE management teams eager to get an earlier than anticipated exit through a SPAC.
At the current filing velocity, the market is already overheated at the billion dollar plus deal size. There were 57 Tech SPAC filings in Jan’21 alone, and there have already been 56 filings halfway through February. Assuming a 6 month cadence between IPO and deal announcement and a significant fall-off in SPAC filings for the rest of the year, we could still see ~300 announced deals at $2B a piece, generating $600B in Tech SPAC M&A value. Make no doubt, the horse is out of the barn, and most of this SPAC cash will be spent on acquisitions. With only 500-1,000 tech unicorns worldwide, something is going to give, whether it be institutional demand, excess valuations and poor aftermarket performance, or possibly just a shut down of SPAC IPOs. We’ve seen it many times before with the IPO cycle.
Rapid Evolution of Tech SPACs in Just 6 Months
The 31 announced Tech SPAC acquisitions of 2021 look very different than the 38 announced in 2020. Wall Street has a history of rapidly advancing and improving on a good thing and then sometimes taking those improvements to excess and abuse – remember the subprime mortgage market that seemed great until it got overdone and launched us into the Great Recession of 2009.
Deal cadence has increased from 15 months to 5 months, as sponsors have gotten more sophisticated and aggressive and are looking to file their next SPAC as soon as possible after their last one.
Although the ’21 vintage SPACs have only had a few weeks performance post-announcement, they are definitely under-performing their ’20 brethren by a significant margin.
The valuations of SPAC acquisitions have soared from 12x revenue on the ’20 vintage to 27x on the ’21 vintage. This is in part driven by the fact that 16% of the ’20 deals were pre-revenue, versus 45% for the ’21 deals. Although there is a strong market for these pre-revenue stories, they tend to be the first to drop like a stone when the markets correct. It also could be a sign that the SPAC sponsors are having a harder time convincing the $100M+ revenue solid private technology companies to go public.
The median deal from ’20 to ’21 has grown from $1.5B to $2.3B, up over 50%. That’s driven in part by the higher IPO proceeds that grew from ~$250M to $300M, and also from higher IPO to deal leverage moving from 5.3x to 7.1x.
Tech Small Cap Public Markets Will Pop After a 23 Year Hiatus
Public listings of U.S. companies hit a peak of nearly 7,439 in 1996, driven by the dot com era and broad and vibrant equity capital markets. When the bubble burst and the dust settled, over 3K of these 7.5K companies were gone and the number of new listings has fundamentally declined for 23 years. In 2022, SPACs will drive the first major surge in public listings in a quarter century.
After the bubble burst, the recession, bad stock memories and massive regulation killed the small cap stock market. Today, there are only 176 U.S. public technology companies between $200M and $3B EV. That number will likely hit 300 when you include SPAC acquisitions by the end of this year. With this ramp in new listings, we will see a rebirth of the small cap ecosystem in institutional and retail investors, research, trading, follow-ons, M&A, and probably more regulation ☺ .
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