Special purpose acquisition companies or SPACs have become a hot trend on Wall Street.
The amount of money raised by SPACs in the past 12 months has topped US$120bil, going by Bloomberg data. The fever is spreading closer to home. Indonesia’s Gojek and Tokopedia consider floating SPACs in the US instead of taking an initial public offering route.
Juwai IQI chief economist Shan Saeed says the current trend of money flowing into SPACs could be a “herd mentality” with many investors who don’t really fathom the cost structure of SPACs.
He points out that while SPACs are a clever financial innovation that provides a cheaper and faster path to becoming a public company than a traditional IPO, there is a lot of misunderstanding about the economics of SPACs.
“Analysis by Michael Klausner Professor of Business and Law at Stanford Law School points out that investors that hold shares at the time of a SPAC merger will see their post-merger share prices drop on the average by 33%. SPACs do not provide stability to investors’ funds in the long run. There is a dearth of audited reports, fair valuation analysis and strategic direction. Hence it is difficult to put a value on these vehicles, ” Shan says.
