Buyout Deadlines: Hundreds of SPACs Face Shutdowns if They Can’t Deliver

Art by Allie Sullberg

Blank check companies may end up overdrawn. Hundreds of them confront a tsunami of deadlines, starting later this year. If they can’t deliver on their promises of making pledged acquisitions, a bunch face liquidation.

That’s the scarifying future for a huge number of these special purpose acquisition companies, or SPACs—funds whose purpose is to buy a business. They were all the rage in 2020 and early 2021, promising an easy way to take a corporation public, without all the expense and regulatory scrutiny of a standard initial public offering.

SPACs’ procedure is the reverse of how corporate takeovers usually happen, which is to identify the target at the outset, then raise the money. A SPAC will do an IPO (much easier to pull off as it has no assets), raise a pile of money, which is put into a trust account, and thus become a publicly listed shell company. The shell promises it will use the money raised to purchase an ongoing enterprise by a certain date.

That way, with little regulatory fuss, the acquired company becomes public, piggybacking on the already-public shell company that bought it. Investors must trust the SPAC sponsors to find the right target. This is why SPACs are called “blank check” operations.

But SPACs have only a year or less to pinpoint their takeover targets, and time is running out for a large number of them. If they don’t do a buyout, they have to give the money back to investors, with interest. “I’ve been saying this is crazy,” said Michael Ohlrogge, a New York University law professor who has studied SPACs, referring to these funds’ modus operandi.  

The wave of merger deadlines will start to build this summer and subside some 12 months later. Specifically, most of the merger deadlines are clustered in the second half of 2022 (138) and the first half of 2023 (440), SPAC Research stats show. The number shrinks drastically after that, with just 49 in next year’s second half. (For the first months of this year, only a smattering of deadlines occur, just 28.)

The reason for this bulge is that SPACs’ time in the limelight was brief, back in 2020 and early last year, when they were being hatched willy-nilly, before they fell out of Wall Street’s favor. “SPACs are a sign of speculative excess,” said Ben Kirby, co-head of investments at Thornburg Investment Management. The enthusiasm for SPACs dissolved in mid-2021, mostly owing to a Securities and Exchange Commission crackdown on the funds.

SPACs Setbacks

The SEC charged that too many of them made unrealistic financial and operational performance projections as they started out—a practice that is banned among conventional IPOs. Also, disenchantment set in over SPACs’ high fees and the advantages that SPAC sponsors enjoy over outside investors. Hence, the number of new SPACs began dwindling in mid-2021.

During their heyday, they might have been too popular for their own good. In their 2020-21 period of maximum hotness, the concept was so enticing that it “encouraged some people to get in the game who weren’t qualified,” said Benjamin Kwasnick, founder of SPAC Research. “We may have more SPACs than we need.”

A painful market plunge ensued. SPACs have suffered share price declines of more than 40%, according to research firm Dealogic. Among the most well-known slides was that of DraftKings, the sports-betting outfit, which Diamond Eagle Acquisition bought in April 2020, at the standard SPAC per-share price of $10. The stock ballooned and reached a peak of almost $72 in March 2021. Then it deflated, along with the rest of the SPAC space. It has tumbled some 70% to just above $21.

A spate of SPAC deals has come unwound lately. For instance, a SPAC called Pioneer Merger had planned to buy Acorns Grow, which produces a savings and investing app, for $2.2 billion. But last month Acorn management pulled out of the union because, as CEO Noah Kerner said in a statement, “market conditions” for the arrangement had deteriorated and the firm thought it could raise more via private investors.

To be sure, the amount of new SPACs being formed may be down from the funds’ halcyon days, but they are still are being created. Thus far this year, 29 have gone public, SPAC Research says.  

“SPACs are here to stay, although at a lower volume,” said Ronald Temple, co-head of multi-asset investing and head of US equity at Lazard Asset Management. “The air’s now out of the balloon. What that means is that better companies will go public.”

Here Comes the Tidal Wave

Meanwhile, the crunch for merger deals is approaching. Due to SPACs’ waning acclaim, each new cohort of SPACs has had increasingly less time to make a purchase, said Professor Ohlrogge, citing his research. “They used to have two years,” he said. “Then in the second half of last year, the average was down to 16 months. Now, it’s six to 12.”

The sheer volume of SPACs seeking deals by mid-year 2023 is so daunting that the casualty count will end up rather high, SPAC Research’s Kwasnick warns. “Plenty” will be liquidated, he said. Others will survive by receiving deadline extensions, and keep going thanks to sponsors providing more capital. The obvious question after that is whether they can acquire a target by the later date, amid a still-crowded field of hungry SPACs.

Already, investor withdrawals of capital are a problem—one that is likely to grow once the deadline wave hits. The share of investors pulling out their money has gone up sixfold over last year, by Dealogic’s stats. A lot of SPACS may find themselves “losing their trust account” if investors exit and sponsors don’t pony up more capital, Kwasnick said.

SPAC investors have the right to bail out of the fund, and that includes exiting once an acquisition target is named. If they don’t like the choice, they don’t have to stay. Certainly, this means the newly bought company then lacks the financial heft it expected from its SPAC buyer. Investors also must approve merger deadline extensions.

In December, a SPAC called 890 5th Avenue Partners suffered an enormous investor outflow as it set out to acquire news site BuzzFeed. Of the $287 million that the SPAC had raised when it went public, only $16 million remained once a horde of 890’s investors had bolted, news reports said. So now, the fund’s stock has been halved since the takeover. The SPAC did not respond to a request for comment.

All told, SPAC costs are three times those of traditional IPOs, Ohlrogge said. Much of that extra cost comes from investor withdrawals, “which deplete funds from the SPAC, usually without a concurrent reduction in any of the SPAC’s expenses,” he added.  

The Extension-Redemption Connection

Trouble is, extensions tend to encourage these investor redemptions. Another SPAC, Malacca Straits Acquisition, saw a planned acquisition vanish in September and couldn’t find a replacement by its Jan. 17 deadline. So it asked shareholders for a six-month extension, which they approved. Next, however, some two-thirds of shares were withdrawn. The fund didn’t reply to a request for comment.

But investors’ power to grant extensions may be fading. Some newer SPACs reserve the ability to give themselves an extension, with zero investor say, noted Ohlrogge. Consider FoxWayne Enterprises Acquisition. As its Jan. 22 deadline neared, the SPAC’s board approved a three-month extension. FoxWayne can push off the deadline two more times, at three months each.

Extensions are often, but not always, conditioned on sponsors providing more funding. FoxWayne CEO Robb Knie forked over $310,000 in the form of a loan. If no merger happens, Knie doesn’t get his money back. The SPAC didn’t return a request for comment.

Nonetheless, that no-repaid loan policy might not be as onerous as it sounds. Often, sponsors who inject additional capital through loans are made whole by getting extra grants of warrants, Ohlrogge said. These allow holders to buy company stock at a specific price on a certain date—they hope it’s after the share price has crept far higher than the warrants’ exercise price. Holders also can sell them before they come due. (It’s not clear from the FoxWayne filing if Knie received such warrants.)

If the SPAC sponsor, though, won’t plug in any fresh capital, that often spells curtains. That was the fate of Yunhong International, which in a filing said that its “inability to consummate an initial business” had hindered the fund’s prospects. As the SPAC couldn’t find an acquisition, Yunhong announced in November it was liquidating. Even though Yunhong had won shareholders’ consent for an extension, the SPAC leadership wouldn’t come up with more money to keep the thing afloat.  

There’s an intriguing footnote about Yunhong—and its indirect link to former President Donald Trump, of all people. Which goes to show how the world of SPACs can be one of surprises.

Based in Wuhan, China, and listed on Nasdaq, Yunhong had former investment banker Patrick Orlando as its CEO. Orlando runs two other SPACs, one of which is hoping to merge with Trump’s planned social media company and get it publicly listed. Some speculated that Orlando wanted to cut ties with a China-based company, as that connection could complicate his Digital World Acquisition’s deal with the Trump outfit. An attempt to reach him was not successful.

The SEC is investigating whether this merger would be legal, on the theory that a SPAC can’t engage in merger talks with a potential target before the fund’s own IPO.

Who knows how this Trump drama will play out? But no one should be astonished if a plethora of other SPACs get smashed to bits in the coming merger time’s-up typhoon.

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