The SPAC Bubble Is Bursting: "Dozens" Of Companies Canceling Mergers As PIPE Investors Evaporate

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by Tyler Durden
Tuesday, May 25, 2021 - 03:21 PM

SPACs have officially fallen out of favor. 

The SPAC bubble burst started with fallen angel Nikola Motors and has since continued, with short sellers and market skeptics unveiling the less than savory elements to numerous names brought public through the merger-style transaction that allows companies to go public quicker, and with less red tape, than the traditional IPO process.

Chamath Palihapitiya, once heralded as the "king of SPACs" is now more likely to be seen as the face of a SPAC bubble that looks as though it is in the process of popping. 

As a result of the bubble bursting, banks are starting to "pass" on funding SPAC transactions. One recent example was Simplifi Holdings, which, when it attempted to go public last month valued at nearly $2 billion, found that bankers, mutual funds and hedge funds were balking at financing the transaction, according to Reuters.

And this is just one of the "dozens" of companies that have canceled or reconsidered due to the changing climate for SPACs. This has been reflected in the Defiance Next Gen SPAC Derived ETF, which is down 28.1% over the last 3 months. 

Investors are now lamenting whether or not SPACs have taken too many companies - specifically pre-revenue companies with little financial prospects - public, too quickly. 

Amir Emami, global co-head of SPAC Coverage at RBC Capital Markets, said: “PIPE investors have really put on the brakes in recent weeks and are focusing on more quality opportunities.”

It is odd to see bankers cool on the deals given how quickly they are generally able to exit from such transactions. PIPE investors can sell shares as little as 30 days after a deal consummates, the report notes.

The number of SPACs has fallen off a cliff: only 30 companies have merged with SPACs since the beginning of April, down from 69 from February to March. 

Latham & Watkins LLP partner Tad Freese said: “Most of the SPAC mergers that are getting announced are trading below $10 a share soon after, so there is a very real possibility that folks will redeem their shares and shoot them down.”

60% of the 146 SPAC mergers that have been announced since the start of the year are now trading below the IPO price of their SPAC, Reuters notes.