For anyone tempted to see the wave of IPOs for special purpose acquisition companies (Spacs) as anything other than a bubble, there is one sobering statistic to consider. Just to satisfy the 500-plus Spacs that have not yet announced an acquisition could require M&A volumes amounting to nearly $1 trillion.
In 2020, there were 256 Spac IPOs, raising $83 billion, according to Dealogic data. In 2021, there have already been 174 IPOs, raising $54 billion. Over that entire period, the average Spac IPO raised about $320 million.
According to SPACInsider, there are 344 Spacs still looking for acquisition targets. Add on the 170 that have filed for an IPO and there is a total of 514 Spacs that will be hunting. Based on the average IPO size, there will be about $165 billion to deploy.
There has already been one 2021-vintage Spac that has announced an acquisition – Northern Star II, which raised $350 million in its IPO in January and has already announced its $5.3 billion acquisition of Apex Clearing.
That’s a deal multiple of 15 times the IPO proceeds. If you were to apply that to the entire universe of Spacs looking for targets, you would get to nearly $2.5 trillion dollars.
It is worth dwelling on that for a moment. After all, the size of all announced M&A deals that involve a US target or acquiror is typically about $3 trillion a year, although that dipped to $2.5 trillion in 2020.
Not all Spac mergers are 15 times the IPO size, of course. Many are closer to five times, but that would still imply M&A volumes of about $900 billion. These are eye-watering numbers.
Nonsensical?
If wrapping up deals on this scale is not feasible, then Spac IPO volumes might be not just unsustainable but nonsensical. Are they?
In just the first two months of this year some $225 billion of Spac mergers have been announced. And the time to identify a target is often getting shorter: Northern Star II announced its merger with Apex less than four weeks after completing its IPO.
But two notes of caution are warranted.
First, there are only so many Spac merger candidates. Companies choosing this route are giving up much of the profile and opportunity for investor dialogue that comes with a traditional IPO.
That makes it suitable for some – unproven businesses designing electric vehicles or funky software – but by no means all.
Second, that universe of targets has, for the moment, been inflated by the decision by some to grab the opportunity Spacs offer while markets remain jittery amid the pandemic. That will not last.
Some bankers fear a dearth of targets will start to be a problem in about six months’ time. If it does, then it will not take long for the Spac IPO tap to be turned off. Whether or not that matters much depends on how you look at the Spac phenomenon – and exactly what skin you have in the game.
Those at most risk, as usual, will be small investors who have jumped on the bandwagon
For sophisticated investors, who take a portfolio approach to investing in Spac IPOs, there will be enough successes to outweigh the failures and the opportunity cost.
It is a similar calculation for advisory banks. Some bankers say they earn more from taking a Spac through from IPO to merger than they would by taking the target public via a traditional IPO. But it is by no means obvious how often this is true.
Not that it matters much. Investors might be thinking of Spacs as an asset class in their own right, but for bankers they are merely one tool in the box for their corporate financing pipeline. Many can be agnostic about whether or not Spacs end up acquiring anything.
Those at most risk, as usual, will be small investors who have jumped on the bandwagon, picking what they think are hot prospects.
The worst-case scenario will be if a sizeable chunk of Spacs, unable to find decent targets, are tempted to agree to just any deal in the hope of turning a quick buck and keep the whole gravy train running.
If that happens, strap in for a wild ride. The regulatory backlash will be too late to help.
