Trading techniques... beware Spacs

The flotation of Trump Media & Technology Group through a merger with Digital World Acquisition Corp shows how special purpose acquisition companies (Spacs) can be a path to a public listing. Usually, a firm keen to enter the stockmarket will offer shares to the public in an initial public offering (IPO). But this can be a protracted and costly process involving the disclosure of detailed financial information. As a result, in 2020 and 2021 there was a sudden surge in the number of firms going public by doing deals with Spacs.

Also known as “blank cheque companies”, Spacs are shell firms floated on the exchange. They have no underlying business; they are set up to buy other companies (although they must do so within two years or return money to shareholders). This offers a cheaper and quicker route to a listing than an initial public offering. But many experts claim Spacs are best avoided, as they attract firms unable to secure a listing the traditional way: either no investment bank is willing to underwrite them or they have problems with their business that they are trying to conceal. Spacs have a mixed record. While the S&P Spac index, which follows a basket of Spac shares traded on US exchanges, rose by 250% between February 2020 and February 2021, it has since plunged. It has performed in line with the wider S&P 500 since 2018. A 2022 study, which tracked Spacs between early 2012 and mid2021, found they tend to lag the market by an average of 14% a year after buying a firm, and by 18% two years afterwards. No wonder the number of Spacs launched plunged from 613 in 2021 to just 31 in 2023.