PSPC boom did not guarantee winners

Not all businesses are suitable for going public through PSPC, despite the number of companies that do.

Why is this important: While SPACs were quickly touted as a faster and better way for companies to go public, in the end, not all companies that have chosen this path are meeting investor expectations.

The big picture: Nearly 200 companies have merged with listed PSPCs in the United States since the start of 2021, across industries including software, biotechnology, electric vehicles and sports betting.

By the numbers: “For the 262 PSPC mergers that were completed in 2020 and 2021, the average share price as at December 31, 2021 was $ 8.70, which is significantly lower than the average price of over $ 10 per share at which the shares were trading at the time of the merger, ”says Jay Ritter, a professor at the Warrington College of Business at the University of Florida, who used data from SPAC Research.

  • Only a quarter (65 of 262) traded above $ 10, although some were above $ 35 per share (eg, Heliogen, Virgin Orbit, and CompoSecure).
  • “The average decline in stock prices during the post-merger period (‘deSPAC’) for the 2020-2021 cohorts is remarkable, given that the stock market ended 2021 near an all-time high,” Ritter adds.
  • According to a Wolfe Research report published in late November, mergers in the past three months have had better returns (-2%) 30 days after the merger compared to the 2020 (-11%) and 2021 (-8%) cohorts.
  • Comparing mergers with “experienced” and “non-experienced” SPAC sponsors 30 days after the merger for the 2019-2021 cohort, the experienced group showed higher returns (-6%) compared to the non-experienced (-10%). The same goes for 7, 90, 180 and even 365 days after the merger, the report notes.
  • To note: While the median returns are almost all negative, we still find that the “experienced” group is doing better (and even reaching + 3% per annum after the merger).

Between the lines: According to Wolfe Research, whether the sponsor of PSPC had expertise in the expertise of the target company is one of the strongest indicators of post-merger performance.

  • For example, financial technology firm SoFi, which merged with Social Capital Hedosophia Holdings Corp. V (classified as an “experienced” PSPC operator by Wolfe), saw its share price appreciate after the merger was finalized. PSPC’s stock also reacted favorably to the merger announcement and had virtually no repurchases. It continues to trade above $ 10.
  • Likewise, companies merging with PSPCs managed by leading underwriters also outperformed, according to a discussion paper by Minmo Gahng, Jay Ritter and Donghang Zhang.
  • Overall, the researchers’ findings reinforce the common refrain throughout this boom that an elite group of sponsors and target companies will emerge and continue to do well.

What to watch: Whether the rush for PSPC continues, or if more companies go IPOs or stay private.