Activity has slowed due to alerts from the US stock regulator and the sale of high-growth stocks
Pity the world of Special Purpose Purchasing Corporations (SPAC) and its recent troubles. There is skepticism about the acquisitions these blank check companies intend to make and the value of their own shares. But there is also a positive side: these two doubts leave room for a smart and almost risk-free business.
The world of SPAC is experiencing such a frenzy that the record of approximately 250 public offerings for the sale of shares (IPO) in the United States in 2020, with which $ 83 billion were raised, has been exceeded in both indicators in the first quarter alone this year, according to SPAC Research. However, activity has slowed as the US stock regulator has issued several red flags and the sale of high-growth stocks in general.
With more than 400 of these instruments still targeting, the merger valuations of-SPAC, the fancy word for the industry for its transactions, were beginning to set the stage for a bubble. The deals depend on entities such as BlackRock and Fidelity becoming co-investors with the SPACs, which adds credibility and funds. These companies are becoming more and more suspicious, and that, according to bankers, causes the value of SPAC’s mergers to decrease. For example, CF Finance Acquisition Corp III, funded by Cantor Fitzgerald, lowered the previously agreed valuation of Target AEye, a self-driving car technology company, by 20% to $ 1.5 billion earlier this month.
Those who acquire SPAC shares – often including retail investors, especially after the deals are announced – have also lost enthusiasm. Of the 36 SPACs with deals announced in April and May that have been tracked by SPAC Research, 25 are trading at share prices below $ 10, the standard price for SPAC IPOs backed by the cash held by the instrument.
That is the key to opportunity. SPAC investors generally have the right to redeem shares at $ 10 before a merger closes. Buying shares below that value means that they can secure a return simply by asking for their money back. If they believe that a specific goal of a SPAC merger will increase value, they can keep their titles.
Better yet, most SPACs carry warrants, basically options to purchase shares later. Buyers who want these units that combine stocks and warrants have to take the risk soon after a SPAC IPO, before the two parties are listed separately. But astute investors who get units for less than $ 10 can write off the stock for a small profit, and still be able to increase it with the warrant. That’s almost free money.