If they overpay for it, that's not good for their shareholders,” said Klausner. "What is the impact of having so many SPACs bidding for a company? Let's say they're bidding for an absolutely fabulous company. As Ivana Naumovska writes for the Harvard Business Review, some 300 SPACs this year are coming up on a deadline where they must find a target to merge with or risk being liquidated. In the months since Klausner, Raun, and Ohlrogge’s study was published, more signs have emerged that SPACs are not only poorly designed vehicles destroying investor capital but also within a bubble that could burst soon. If you sell 10 shares for 10 bucks each and then give away 10 shares for free, you're effectively selling shares for five bucks each.” “If you're giving away a set number of shares for free and you don't know how many shares you're going to sell, then you're not certain about what the real price per share you're going to get is. "People say SPACs are great because you lock in a price and you know what it's going to be, but actually you don't really know the price,” Ohlrogge told Motherboard. The team calculated the total dilution cost was 254 percent of the cash Twelve Seas delivered, putting it just below the 75th percentile of SPACs they examined in terms of costs. The merger company received $37 million in cash, but its sponsor had 4 million shares for free, the underwriter was paid $15 million for shares that were almost entirely redeemed, and some $36 million in warrants and rights promising free shares were circling around. It saw 82 percent redemptions, raised no new money at the merger, and its sponsor held over 4 million shares (essentially for free) while there were only 3.7 million shares available publicly. One particularly illuminating example of the unpredictability of SPACs in Klauser, Raun, and Ohlrogge’s study centers on the Twelve Seas Investment Company, which initially raised $207 million by selling 20.7 million units to the public. Even when they don't fail, though, you can end up with a situation where redemptions are so high, that the company is getting a very small amount of cash-something like 15 percent of the SPACs we looked at ended up only delivering $10 million or less in cash." “Sometimes the redemptions are too high that the deal just falls through completely and the company doesn't go public. It all really comes down to redemptions,” Ohlrogge told Motherboard. "The biggest misunderstanding that I see persisting is the notion that SPACs justify their high costs by giving companies going public great certainty that the deal will go through at a certain point. Compare this to the median SPAC dilution cost of 50.4 percent. Their data suggests that 20 percent is a reasonable representative figure for a given IPO pop, and after adding on an average IPO underwriting fee of 7 percent, and arrive at a 27 percent IPO cost. The research team used these overlapping assumptions-that the SPAC or the IPO would have sold more shares without sponsor dilution or underwriter underpricing-to compare dilution costs to IPO pop costs. But as we’ve already seen, most SPACs don’t do so well. Of course, some investors will drink the Kool-Aid and believe that the company will increase in value by at least that much and hopefully more. This means that the company's value must increase by 14.1 percent or the cost of the SPAC and its dilution will be eaten by shareholders or the target company. By this metric, a SPAC’s median costs sit around 14.1 percent of the post-merger equity. Another way to understand it is as a percentage of post-merger equity, so we can understand how much value a SPAC must add to justify itself. If you look at it as a percentage of cash delivered-that means the IPO proceeds minus redemptions but plus new money from private investors-then the median cost is 50.4 percent. “SPAC shareholders were bearing the cost inherent in the SPAC structure” A November 2020 study by Klauser, Raun, and NYU Law professor Michael Ohlrogge found the median cost of warrants and rights alone to be $1.66 for every $10 delivered in a merger. But after the sponsor and other investors cash in their shares and use their rights and warrants (which ultimately convert to shares), suddenly there are a lot more shares in play, a lot less cash behind each share, and thus mine are actually worth less.Įssentially, investors that hold on are paying for the sweet deal offered to those that redeem their shares. Those 10 shares are 10 percent of the company. Remember those rights and warrants? Consider this: I invest in a hypothetical SPAC with 100 shares and buy 10 for myself. The SPAC structure is a deeply flawed one, because of how much the shares of investors that hold on post-merger are diluted.
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