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Will the SPACs Boom Continue?

Will the SPACs Boom Continue?

In the past few years, special-purpose acquisition companies (SPACs) have been all the rage. Despite a recent slowdown in their growth, Goldman Sachs predicts that SPACs will drive $900 billion worth of deals over the next two years. This prediction is based on a forecast from April, showing that although there has been a slowing boom, deal-making by these firms could still reach historic highs this year and next.

The question remains: will this type of company continue to be popular among investors?

The answer is no if you ask Clay Risher, director of business development at TrueNorth Capital Partners LLC Stamford, CT.

“I think that trend is going to sort of start to diminish,” he said, adding that things will eventually revert to the traditional merger model.

A SPAC exists only to buy a company or companies of its own choosing and is structured as a publicly held entity. In exchange for the cash SPACs receive from investors to finance their acquisitions, they offer shares at a discount on an open market that can be traded on public exchanges like Nasdaq or NYSE. Many companies choose to go public via a SPAC rather than a traditional IPO because of the reduced risk and costs associated with going public.

Despite the slowdown, major SPAC deals continue to be announced. On Wednesday, Pagaya, a US-Israeli fintech startup, reached a $9 billion deal to be acquired by a SPAC called EJF Acquisition.

Jonathan Bluth, Co-Head of Healthcare at Intrepid Investment Bankers LLC in Los Angeles, Ca, believes that SPACs are driving up merger and acquisition (M&A) valuations.

“For more than a year now, SPACs have been setting the pace with strong valuations.  SPACs can gain shareholder approval to pay big numbers today based on the promise of future growth potential, and can offer a substantial amount of equity currency to go out and make aggressive acquisitions.  This has caused private equity investors and other traditional strategic acquirers to re-evaluate how they pursue attractive companies, so they can be competitive,” he said.

“Intrepid recently advised one of our clients in its sale to an acquirer that had recently gone public via a SPAC, and the outcome was very attractive for everyone involved.  It is unclear how long this SPAC window will be open, but sellers should consider SPACs in their processes for as long as they can continue to offer strong valuations,” he added.

Others are not as confident. For example, Robert Whitney, managing director of Seale & Associates in Arlington, VA, doubts that this boom is anything more than a short-term trend.

“SPAC activity has ebbed and flowed several times over the 20 years or so I’ve been in M&A” he said.

“Their popularity seems to cycle through every ten years or so as a potential solution. Ultimately, I think there are many other factors that are going to continue to drive the overall market – such as liquidity, cost of credit, age if business owners, ongoing changes to tax code, and on and on. So, you know, with SPAC or without SPAC, I think it’s going to continue to be a very frothy environment for the next 12-18 months, if not beyond that,” he added.

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By Lou Sokolovskiy, Founder & CEO at Opus Connect
October 2021

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