Numerous market analysts considered 2021 to be the year of SPACs (special purpose acquisition companies), which are publicly traded entities existing primarily for raising capital and acquiring private companies. However, it seems that a year after bold predictions, the current situation has shown that 2022 is the year in which the SPAC boom becomes merely a one-year flash.
Most Money Goes to Bankers
The American biotechnology company Ginkgo Bioworks went public last September and proved to be an extremely attractive option for investors and Wall Street bankers who assisted in that transition. After just a few weeks on the stock market, Ginkgo’s shares soared.
This was enough justification for numerous advisors who, according to regulatory filings, ‘harvested’ approximately $135 million in earnings after the merger of SPAC and Ginkgo.
Nine months later, the biotech giant’s public debut looks like the end of the SPAC boom, a frenzy that lasted 18 months and catapulted a large number of companies from private to public, enriched Wall Street bankers, and undoubtedly harmed investors, reported the Financial Times.
Ginkgo’s shares have fallen more than 70 percent from their peak at the end of last year, prompting U.S. regulators to propose reforms that would limit SPACs’ ability to make far better projections than those allowed in a traditional IPO.
In fear, there are big eyes and quick feet, so the banks involved in such processes are already retreating into the shadows. Goldman Sachs, which was one of the largest sponsors in the market last year, second only to Citigroup, has paused all SPAC-related offerings.
To make matters worse, they have terminated collaborations with most companies they ‘helped’ go public.
Rimac Was Smarter
Let us remind you that we wrote last year about the phenomenon called SPAC when Mate Rimac said that his company Rimac Automobili was the ‘girl everyone wants to marry’, but it seems they played their cards differently.
At that time, Rimac told the Financial Times that the frequent use of SPACs could seriously harm the sector and that this is not the way his company would ever go public.
Goldman Sachs, which is currently fleeing from all its SPAC offerings and companies it took public and practically destroyed, recently injected a staggering $500 million into Rimac’s company together with SoftBank.
Just imagine how different things would be today for the second Croatian unicorn if he had decided to go public via SPAC. The same banks that are investing in him today would have stripped him without a second thought back then.
Although SPACs have existed for decades, they have long had an extremely bad reputation. It was well known that their offerings were mostly used by companies whose financial condition could not survive investor scrutiny on the way to a traditional IPO.
They Have Existed for Decades
Things drastically changed at the beginning of 2020 when large financial firms, venture capitalists, and hyped start-ups embraced SPACs as a faster and easier route to the public market than an IPO. There are many reasons why they have recently become unattractive, but two stand out the most.
Inflation is rising week by week due to the current supply chain crisis, prompting the Federal Reserve to raise interest rates and investors to pull their funds from SPAC agreements to invest them elsewhere. Additionally, regulatory market oversight is increasing, making them no longer as attractive to major players as they once were.
In recent months, investors have increasingly invoked their contractual right to redeem their shares in SPACs, reported the New York Times. Looking back, not so long ago, 54 percent of shareholders would opt for share redemption after the merger announcement. Now, even 80 percent of investors in some cases have sought refunds, leaving numerous companies stripped and nearly dysfunctional.
The concern that too many investors might seek their money back is the reason for the collapse of the merger between Kin Insurance and Omnichannel, Matt Higgins’ SPAC. One example of frightened investors is the well-known media company BuzzFeed, which took only $16 million from its merger.
That amount seems symbolic compared to the $250 million they expected, but investors decided to return their stakes. Those who were worth a lot overnight are now on the breadline due to SPACs.
