Blank-Check Mergers Grabbing Ever-Bigger Slice of M&A Market

Mergers involving blank-check companies are taking a larger share of U.S. deal-making volumes, as vehicles raised during the frenzy of the past year find targets and near the finish line.

In the first quarter, $166 billion in deals related to special purpose acquisition companies were announced, said Kristin Zimmerman-Sorio, who heads Morgan Stanley’s SPAC M&A practice. That eclipses all M&A deals involving SPACs last year.

“When you compare that to overall M&A deal volume, SPAC activity represents about 30% of deal volumes today,” she said, speaking Thursday at a virtual session at the Tulane University Annual Corporate Law Institute conference.

The size of the deals is increasing, with the average size of an announced SPAC merger now at $2.3 billion, according to Zimmerman-Sorio’s presentation at the conference. That’s up from $900 million and $800 million in the first quarters of 2020 and 2019, respectively.

Some are even becoming megadeals. Grab Holdings Inc. is in talks to merge with Altimeter Capital’s first blank-check company, in a deal that could value the Southeast Asian ride-hailing giant at about $40 billion, people familiar with the matter said this week.

There are about 400 SPACs on the hunt for target companies, Zimmerman-Sorio said, adding that they’re getting increasingly creative in their criteria for targets, including cross-border transactions, corporate carveouts and deals that include multiple assets.

Criticism, PIPEs

Still, cracks are starting to show in some of the deals that have been announced since the SPAC surge began last year.

This week, a Velodyne Lidar Inc. founder who had resigned criticized the company’s new leaders, who arrived after the company’s SPAC deal closed last year. Velodyne has disputed his claims.

Elizabeth Cooper, a partner at law firm Simpson Thatcher & Bartlett LLP, said the SPAC process can sometimes provide less certainty than regular initial public offerings or mergers because of the private investments in public entities, or PIPEs.

With an IPO or a traditional M&A deal, there’s a better sense of valuation earlier on, Cooper said.

“What you’d probably only have with a SPAC is a letter of intent and you actually haven’t gotten the check from the PIPE process that your valuation is good,” she said.

PIPEs, which have become staples of these deals, provide the additional capital that SPAC sponsor teams raise to support a transaction. They often include brand-name institutional investors to add validation.

SPAC ‘Indigestion’

The PIPE commitment is also not paid to the target company when the deal is closed, which could take about a quarter and potentially longer.

Almost every SPAC merger that was announced in the past year has a PIPE attached. It also helps lessen the dilution of the SPAC and sponsor promote and is sometimes even more sizable than the blank-check company’s own capital.

SPAC pioneer Martin Franklin, who launched two blank-check firms on U.S. exchanges, said on Bloomberg Television Thursday that while SPACs are here to stay, they will require some changes.

“This has become a bit of a bandwagon,” Franklin said. “A lot of players who shouldn’t be capital allocators are now becoming capital allocators and that’s going to create some indigestion.”

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