Spac craze fizzles with bankruptcies and investor losses of $46bn in 2023
Wall Street’s affair with blankcheque companies, the finance fad that pushed companies on to the stock market during the Covid-19 pandemic, ended 2023 with a string of big bankruptcies and even bigger losses for shareholders.
At least 21 companies that went public by merging with special purpose acquisition companies, or Spacs, went bankrupt last year, according to Bloomberg data.
Measured from their peak market capitalisations, the insolvencies bookend the loss of more than $46 billion in total equity value.
The failures span money-losing electric vehicle start-ups and forward-thinking farming companies. Blank-cheque companies were good at propelling their targets to the public market even when they lacked wellformed financials, said Gary Broadbent, an executive guiding former Spac AppHarvest through its liquidation.
Many weren’t “ready for prime time”, he said.
The largest Spac bankruptcies included that of flexible workplace provider WeWork, which had a $9.4 billion market value after going public in 2021. It succumbed to Chapter 11 [of the US bankruptcy code] in November with plans to jettison expensive office leases.
Electric vehicle makers Proterra and Lordstown Motors also enjoyed sizeable market values, topping out at about $3.7 billion and $5 billion, respectively, before filing for bankruptcy last year. Many of these companies sought protection from creditors less than two years after going public. Software firm Near Intelligence filed for bankruptcy in December, less than nine months after its stock started trading on the Nasdaq.
Many had predicted the wave of bankruptcies. Critics called the Spac frenzy a bubble soon after it began.
Going public through Spac has historically been faster and faced less scrutiny than traditional initial public offerings.
During the boom, companies targeted by blank-cheque firms also often made more optimistic projections about the trajectory of their businesses than would be seen in old-fashioned IPO processes.
Arrangers also had incentives to complete less-than-pristine mergers. Early investors could redeem Spac shares at $10 if they didn’t like the deal, for one.
Excitement over meme stocks and the promise of high valuations encouraged private companies to complete blankcheque mergers at a rapid pace, said Usha Rodrigues, a law professor at the University of Georgia who has studied Spacs.
The result was a glut of Spacs that Ms Rodrigues described as “a ticking time bomb” of corporate failures that materialised in 2023.
More trouble is probably on the way as higher interest rates affect company balance sheets.
About 140 other former Spacs will probably need more financing in 2024 to keep operating, Bloomberg estimates.
Spac companies were also more likely than their corporate peers to raise doubts about their future, according to Hudson Labs, an investment research software company that analyses regulatory filings.
Nearly 44 per cent of Spac companies that filed annual reports in 2023 have reported concerns, compared with about 22 per cent of non-Spac companies, Hudson Labs said.
Some shareholders have filed lawsuits, hoping to recover their losses. Lordstown stockholders accused sponsors behind its Spac of overstating demand for its flagship Endurance vehicle. As Lordstown was preparing to go public in 2020, the company touted a backlog of 38,000 vehicle pre-orders.
Lordstown’s stock fell after short-seller Hindenburg Research accused the company of overstating demand for the Endurance. Lordstown denies wrongdoing.
Federal regulators have been slow to respond to the Spac craze, despite Gary Gensler, chairman of the Securities and Exchange Commission, being a vocal critic of the manoeuvre.
In March 2022, the SEC proposed new rules that would require additional disclosures.
At least 21 companies that went public by merging with special purpose acquisition companies went bankrupt last year