The special purpose acquisition company (Spac) boom is cooling. Spacs are shell firms that list on the stockmarket in order to raise cash. They then use the money to merge with another company.
For start-up founders, Spacs offer a route to a public stockmarket listing that is less bureaucratic than the traditional initial public offering (IPO). They have been used to launch everything from electric-vehicle (EV) makers to space tourism business Virgin Galactic.
Around 250 Spacs launched in America last year, raising $83bn. Between February and March, 69 companies agreed to merge with Spacs, but that number has fallen to just 30 since the start of April, say Echo Wang and Anirban Sen on Reuters. Dozens of firms have ditched merger plans of late.
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No wonder, says Heather Somerville in The Wall Street Journal. Flotations have started to flop. An analysis of tech firms that have gone public with Spacs since the start of 2020 found that share prices have since fallen by an average of 12.6%. Public markets demand quarterly updates and ask tougher questions than venture capitalists, who are more willing to take a punt.
These signs of “market discipline” are welcome, says The Economist. Some Spac deals have been driven by “extreme delusion”. Five EV firms that went public via Spacs last year say they can go from “making no [sales] to $10bn... in under five years… Not even Google [did] that”.
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