One examination of SPAC mergers from 2004 through 2021 found that only 35% of firms with post-merger revenue met or beat projections, according to the study’s authors, academics from the University of Washington, the University of North Carolina at Chapel Hill and the University of Michigan. SPAC revenue projections were about three times larger than revenue growth achieved by companies that listed via IPOs, according to their paper dated in February.
Read a Bloomberg analysis: Wall Street is churning out SPACs at investors’ peril
“There’s a strong temptation to make those forecasts look better than reality because SPAC sponsors benefit so much from closing a deal,” Elizabeth Blankespoor, an associate professor at the University of Washington’s Foster School of Business who co-wrote the research, said in an email. The vehicles likely make such forecasts “because SPACs think there is little punishment if their forecasts are wrong.”
The SPAC boom also enriched individual bankers. A number of firms have been awarding star bankers more than $10 million a year for their work with blank-check firms and other deals, people familiar of the matter said, asking not to be identified discussing private information.
The life cycle of a SPAC begins when sponsors put up a relatively small amount of money and hire a bank to help them hold an IPO, looking to raise much more so they can hunt for a merger. That’s been a fairly low-risk process for bank underwriters, because the SPAC is essentially hollow, with no business to describe. Banks can later earn more by helping the blank-check firm merge with a private company, thus taking it public, in a process known as a de-SPAC. That’s when projections are made.
The total amount earned by banks in both steps of the process is similar to what they get for handling a traditional IPO, but for less work.
The new SEC proposals seek to deter rosy projections by deeming the banks that underwrite an IPO to also be “statutory underwriters” for the de-SPAC, if they help with that part of the process.
“It was inevitable that the SEC would propose these changes,” said Morris Defeo, partner at New York law firm Herrick Feinstein. “Whenever a particular segment of the market gets frothy, the SEC will inevitably want to get involved.”
Signs of froth now abound. Electric carmaker Lucid Group Inc., formed through one of the highest-profile SPAC mergers last year, began trading publicly in July and by November reached a market capitalization of $91 billion. A presentation during its de-SPAC suggested revenue could surpass $22.7 billion in 2026. But amid supply chain woes, it missed one of its initial estimates, generating $27 million of the $97 million in revenue it had forecast for last year. The stock is down 75% from the November peak.
Citigroup Inc. was the lead underwriter for the SPAC that merged with the company, and the bank later advised Lucid on the combination. The lender, which has underwritten well over 100 SPAC listings since beginning of 2021, paused new issuance this year, Bloomberg reported last month. Since January 2020, the bank positioned itself to reap a total of $2.6 billion in upfront and deferred fees, according to SPACInsider.