The Paradox of SPACs
Stock Price Rise Turns Out to Be a Poison
Controversy Over Overvaluation of Merger Target Companies
Increased Possibility of Merging with Troubled Companies
[Asia Economy Reporter Hwang Junho] The commonality among Lucid, Nikola, DraftKings, and Virgin Galactic is that they are companies that have been or will be listed through mergers with SPACs (Special Purpose Acquisition Companies). SPACs are increasingly becoming a means for high-growth potential companies to secure funding through a backdoor listing.
However, the intense interest in SPACs leading to stock price increases can actually have negative consequences from an investor's perspective. It can make mergers more difficult or create burdens in verifying the actual substance of the target company. This results in a kind of SPAC paradox.
The SPAC Paradox: Stock Price Increases Are Bad News
Last month, the news of the merger between Lucid Motors, an electric vehicle company dubbed the "second Tesla," and the SPAC Churchill Capital IV Class A (CCIV) heated up both the US and domestic stock markets. In the US, CCIV's stock price soared, and related stocks in Korea also rose in tandem.
When a SPAC's stock price rises like this, the merger price also increases. The merger price is calculated based on the stock price, i.e., the market price. The actual corporate value of a SPAC is its net asset value plus a listing premium and is unrelated to stock price fluctuations. In such a situation, if the merger price rises, the target company must pay a higher listing premium accordingly. For example, if CCIV's stock price, which was $29 per share on the 2nd of last month, surged to $58 by the 18th, Lucid might consider looking for another SPAC.
The merger between Lucid and CCIV resulted in Lucid's value being excessively reflected due to the soaring stock price. The market capitalization of the merged entity was $54 billion, higher than the US automaker Ford but lower than GM. This is an extremely high valuation for a startup that has not yet produced any cars. Consequently, the stock price plummeted.
Stock Price Increase Opens Door for Distressed Companies to Go Public
Moreover, if the target company gains the upper hand in negotiations, the possibility of distressed companies going public increases. From the SPAC's perspective, since profits can only be made if the merger succeeds, there is a high likelihood of overvaluing the target company. Nikola (NKLA), which was embroiled in fraud controversies, is a representative example.
Additionally, the rise in SPAC stock prices causes early investors to exit. It is more advantageous to secure profits amid uncertainty about which company will be merged. There is also the problem of voting rights for the merger being dispersed due to shares released by early investors.
Park Beomji, a researcher at Meritz Securities, analyzed, "In the same context, the increasing number of already listed SPACs is also negative from an investor's perspective," adding, "If listed SPACs are supply and companies seeking listing are demand, an oversupply issue may arise, which reduces the SPAC's negotiating power and merger potential, ultimately leading to an increase in liquidated SPACs."
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