Tuesday’s selloff in speculative pockets of the market is hitting stocks of premerger special purpose acquisition companies, or SPACs.
That includes numerous SPACs whose share prices have climbed since the fall on rumors—or speculation—about coming deals. Shares of Bill Ackman’s Pershing Square Tontine Holdings (ticker: PSTH), for example, were down more than 3%; Chamath Palihapitiya’s Social Capital Hedosophia Holdings IV (IPOD) lost almost 6%; and Dan Och and Glenn Fuhrman’s Ajax I (AJAX) dropped 5%. All remain well above their initial public offering prices.
Several SPACs that have recently announced deals but have yet to complete their transactions were also falling. VPC Impact Acquisition Holdings (VIH) tumbled 15%, TS Innovation Acquisitions (TSIA) lost 14%, and Atlas Crest Investment (ACIC) fell 13%, and Rodgers Silicon Valley Acquisition (RSVA) plunged 14%.
One of the biggest SPAC declines on Tuesday came from Churchill Capital IV (CCIV), which announced its plans to merge with electric-vehicle start-up Lucid Motors on Monday evening. That deal had been rumored for weeks, and the SPAC’s shares had run up to $57.37 at Monday’s close—versus a trust value of just over $10 per share. Investors were selling the news on Tuesday, with Churchill IV’s stock down a whopping 31%.
Exchange-traded funds that hold SPACs were down, too: the SPAC and New Issue ETF (SPCX) lost 3.1% and the Defiance Next Gen SPAC Derived ETF (SPAK) fell 7.6%, weighed down by shares of post-SPAC-merger stocks it also holds. Those two had been up 23% and 17%, respectively, in 2021 before Tuesday’s declines.
SPACs go public as cash shells, raising money from IPO investors to later put toward a merger with a private operating company. A SPAC’s backers—called sponsors—are responsible for identifying and agreeing a combination with a business, which becomes publicly traded in the process.
In the meantime, the cash sits in a SPAC’s trust, earning some modest interest. Shareholders who don’t like a SPAC’s proposed merger also have a chance to redeem their shares for a proportionate share of the SPAC’s trust cash at the time of the merger. That term effectively puts a floor on the SPAC shares’ price. But anything above that trust value is a bet on the sponsors being able to secure a deal worth more than the cash the SPAC is putting up.
Several high-profile companies have emerged from SPACs in the past few years, and their stocks have soared. Count DraftKings (DKNG), QuantumScape (QS), and Virgin Galactic Holdings (SPCE) among the biggest post-SPAC merger success stories. Seeing that performance, many traders and investors have piled into shares of premerger SPACs hoping that they will produce the next well-received deals. That has been doubly true for SPACs focused on target areas like EVs or fintech, or for those from sponsors of past winners.
But without a tangible deal on the table, a run-up well above a SPAC’s trust value is based on speculation alone. When there’s no return on cash, the opportunity cost of parking some money in a SPAC before its deal announcement is low, and risk is limited to the premium paid above the trust value.
Rising bond yields increase the returns on cash elsewhere, however, and increase the opportunity cost of waiting. That thought process is the trigger for Tuesday’s selloff, but the SPAC market was already primed for a correction after the speculative run it has had.
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