SPAC Analyst Sees Very Brief Window Before Stocks Lose Money

Bookmark

The longer a portfolio holds a special purpose acquisition company, the worse it’s going to perform, according to a new study by a special situations research firm.

Most SPACs lose money after finding a company to acquire, and they do so at an accelerating rate over the 12 months that follow a merger. That’s according to the Edge Consulting Group, a team of analysts that covers special situations, which researched 115 SPACs that closed acquisitions between 2015 and the end of 2020.

Initial public offerings by blank-check companies spiked during the pandemic. The listings snowballed some more when stocks pushed to new records in 2021. More than 120 SPACs have gone public already in 2021, raising nearly $40 billion for potential acquisitions, according to data compiled by Bloomberg. But, on average, they have underperformed traditional IPOs.

“What surprised us was how short-term these benefits are and how quickly the returns and outperformance drops off,” said Alex Korda, an analyst at the firm. “SPAC investors should adjust to focus on the post-merger sweet spot.”

That sweet spot, Korda said, is the first few months after a SPAC makes its acquisition. Returns usually drop after that, until a year after the merger, when the company has normalized and is no longer viewed as a post-SPAC situation.

Alternatively, investors can get in to a SPAC shortly after its IPO, before knowing what it will acquire. Those bets are more likely to pay off than trading around a merger announcement, the firm found, but at the cost of significant uncertainty and limited opportunity for due diligence.

“With SPACs being a fairly new trend, it’s probably too early for broadly applicable assumptions on how this plays out and whether they’re truly a good measure for value creation,” Korda said. “It’s important for investors to catch that brief period post-merger for that balance of due diligence and better returns.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.