SPACs warn they could go bust in crash
- 25 companies that merged with a SPAC have warned they could go bankrupt within a year, according to a data analytics firm.
- These companies were listed on the stock exchange by merging with a blank check company rather than through a traditional IPO.
- SPACs exploded in the first half of 2021, but the market has struggled ever since.
25 companies listed during the
boom 2020 and 2021 have already issued warnings that they could go bust within a year, according to a data analytics firm.
Audit Analytics found that 10.8% of 232 stocks that merged with blank check companies in the past two years issued going concern warnings, indicating a company will struggle to stay afloat over the next 12 months.
A SPAC, or special purpose acquisition company, raises money through an IPO and then aims to acquire or merge with another company. Chamath Palihapitya is a prominent sponsor, while companies such as Lucid Motors and Virgin Galactic have merged with SPACs to list on public markets.
These blank check vehicles raised $96 billion in the first quarter of 2021 alone, according to the Harvard Business Review.
But the market has struggled since that boom. Morgan Creek’s Exos SPAC Originated ETF, which tracks such vehicles, is down 44% in the past year.
21 of the 25 vulnerable companies had revenue of less than $100 million in 2021, according to Audit Analytics. Just under 6% of all stocks listed on the New York Stock Exchange and Nasdaq issued continuity warnings last year, the company’s director of research, Derryck Coleman, told Insider.
SPACs tend to merge with high-growth tech companies that want to avoid the traditional IPO process. These types of stocks have struggled this year as investors factor in rising interest rates and
risks, with the tech-heavy Nasdaq 100 down more than 20% year-to-date.
“The cycle has turned and investors have turned to different sectors,” Julian Klymochko, who runs an arbitrage fund SPAC, told Insider. “Blooming is pink for many of the unprofitable small-cap hyper-growth companies that have recently gone public…they have to batten down the hatches to live and fight another day.”
A maker of air taxis, several electric car makers and a scooter rental company are among post-merger SPAC stocks that have issued going concern warnings, according to the Wall Street Journal.
“These companies are struggling right now because they’re not self-financing, and early stage start-ups have by and large lost access to capital,” Klymochko said. “If investors no longer want to finance these energy-intensive companies, they unfortunately have to consider strategic alternatives.”
Read more: A SPAC investor shares 18 top picks from 4 blue ribbon blank check sponsors – and he and 2 other industry experts break down what to expect this year after a crazy 2021