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Spac redemptions: the money is illusory until shareholders decline refunds

Special purpose acquisition companies updates

“Assumes no redemptions” may be the diciest phrase on Wall Street. The Spac boom that raged in early 2021 is in sharp retreat. Many so-called blank-cheque mergers are under water. Litigation and a regulatory crackdown are under way. Some investors are exercising their right to get their money back.

More than half of Spac shares have been redeemed during the third quarter so far. That compares with just a tenth in the first three months of the year, according to data provider Dealogic.

For all the hype and occasional masterstrokes, Spac mergers are a high-wire act. The company that is going public does not know exactly how much money it is raising until the last moment. In contrast, the financial analysis presented in deal marketing documents assumes there will be no leakage. Mass redemptions are not merely an embarrassment, Spac companies are often in their early stages and need the proceeds to survive.

In May, the Spac Locust Walk Acquisition Corp announced that it would merge with cancer biotech eFFECTOR, valuing the target at $419m. The company did not have a product on the market yet. The $175m raised by Locust Walk, which owes its odd name to a University of Pennsylvania thoroughfare, was important to the business. But even as the deal prepares to close, investors have redeemed 17m shares — $170m of the $175m eFFECTOR had originally expected.

While the company still managed to raise $60m in cash from institutional investors in a so-called Pipe transaction, the echoing Spac pot is likely to force the company to scrounge for new money more quickly than it had expected.

The blank-cheque merger method was supposed to be a quick and efficient way for businesses to reach public company status. Rule changes around Spacs in recent years have made it easier for deals to win shareholder approval. The sting in the tail for companies is that little financial commitment is required from investors. It is a point bankers should make to their corporate clients as enthusiasm ebbs away.

The Lex team is interested in hearing more from readers. Please tell us what you think of Spacs in the comments section below.

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