[Controversial Specs] ① Among 17 Spec Merged Listed Companies, Only 2 See Stock Price Rise After Listing

17 SPAC Merged Listed Companies by November, 1 More Added in December... Second Largest Record Ever
SPAC Merger Price Discounted Compared to Standard Market Price, Premium Applied to Merged Entity's Intrinsic Value
13 of 15 SPAC Merged Listed Companies Submitting Q3 Reports Recorded Losses

This year, SPAC (Special Purpose Acquisition Company) listings and mergers are expected to reach record levels. However, despite the SPAC boom, controversies such as corporate overvaluation and backdoor listings continue to linger.

According to the Korea Exchange on the 5th, 17 companies have entered the stock market through SPAC mergers up to the end of last month. Including one company scheduled to be listed this month, a total of 18 companies have been listed via SPAC mergers this year. This is the second-highest number after 2017 (21 companies).

As SPAC mergers gain momentum, new SPAC listings are also continuing. Up to the end of last month, 32 new SPACs have been listed this year. Adding four more scheduled to be listed this month, the total number of newly listed SPACs this year will be 36, marking the second-largest scale ever. Last year, 45 SPACs were newly listed.

Introduced in 2009, SPACs are special purpose entities aimed at mergers and acquisitions (M&A) of unlisted companies. They raise public funds by issuing new shares and get listed, then must merge with an unlisted company or a KONEX-listed company within three years. Investors indirectly participate in corporate acquisitions through trading SPAC shares. The target companies can enter the stock market by merging with the listed SPAC.

Choi Jong-kyung, a researcher at Heungkuk Securities, explained, "The advantages of SPAC merger listings include the ability to confirm merger inflow funds (public funds) from the initial review request, limited impact from external variables, and the potential for companies with low market recognition to benefit in valuation." He added, "The number of SPAC merger listings has consistently remained around 15 companies annually, playing a significant role among new listing methods in the securities market."

However, controversies have not ceased alongside SPAC growth. First, there is the issue of overvaluation of SPAC-listed companies. In SPAC merger listings, there is no institutional demand forecast process, and merger ratios are determined based on absolute corporate value without comparable companies. This has raised ongoing concerns about the possibility of inflated corporate values. An analysis by the Financial Supervisory Service of 54 SPACs that completed mergers from 2019 to September 2022 showed that SPAC merger prices tend to be discounted compared to the standard market price, while the value of the merged companies tends to be marked up compared to intrinsic value.

Looking at this year's SPAC merger-listed companies, their performance has generally deteriorated after listing. According to the Financial Supervisory Service's electronic disclosure system, among the 17 companies listed via SPAC mergers up to last month, 15 that submitted quarterly reports for the third quarter all showed a decline in cumulative net profit for the first three quarters compared to the same period last year. Of these 15, 13 recorded losses; 10 turned to losses, and 3 saw an increase in loss magnitude. The two companies that did not record losses also saw a decrease in net profit compared to the previous year. Some of these companies reflected merger costs as temporary expenses, resulting in losses. Regarding cumulative operating profit, more companies showed deterioration than improvement. Only 4 out of 15 companies had increased cumulative operating profit compared to the previous year’s third quarter. Conversely, 4 companies turned to losses, 2 saw increased loss magnitude, 4 experienced decreased operating profit, and 1 company reduced its loss magnitude.

Not only performance but also stock price trends after listing have generally been weak. Among the 17 companies, only 2 saw their stock prices rise after listing. Raontech (35.98%) and Xgate (28.76%) were the only ones with stock price increases since their listing dates. Finecircuit and Selbiohumantech saw their closing prices on the 1st fall by more than 60% compared to their listing day closing prices. Yulchon (-58.8%), Senizen (-48.82%), Veloc (-42.65%), and Pamtech (-38.06%) also experienced significant stock price declines.

Kim Nam-jong, a research fellow at the Korea Institute of Finance, pointed out, "SPACs can provide listing opportunities for unlisted small and medium-sized enterprises with growth potential and offer relatively safe investment means for general investors in the M&A market. However, there is a risk that general investors may suffer losses due to possible overvaluation of merged companies, information asymmetry among investors, and excessive speculative trading aimed at simple capital gains."

Recently, the controversy over Pado’s 'inflated listing' has brought the issue of SPAC overvaluation back into the spotlight. Some companies planning SPAC mergers appear to have lowered their valuations in response. Hana Financial 25 SPAC announced in a corrected major report on the 24th of last month that it adjusted the merger ratio with PIE from 1 to 0.9002521. The initial merger ratio decided in May was 1 to 0.7386615, then it was adjusted to 1 to 0.8140671 in a corrected major report on October 31, and now it has been adjusted again. The number of PIE shares to be issued per one Hana Financial 25 SPAC share increased from 0.73 to 0.90. Hana Must 7 SPAC also issued a corrected major report on the 23rd of last month, revising the merger ratio with Sapien Semiconductor to 1 to 0.1304648. The initial merger ratio announced in June was 1 to 0.1086420, then corrected to 1 to 0.1119482 on the 14th of last month, and now adjusted again.

Due to the Pado incident and others, listing reviews are expected to become more stringent. A Korea Exchange official explained, "The Exchange mainly reviews the continuity of the company, appropriate disclosures, and future corporate stability during listing examinations. For SPACs, when judging future sales, management stability, and business continuity, we carefully check whether sales figures have been inflated."

There are opinions that disclosure obligations and other measures should be strengthened to prevent inflated listings. Research fellow Kim Nam-jong said, "To mitigate information asymmetry in SPACs and the possibility of overvaluation of merged companies, and to encourage general investors to make informed mid- to long-term investments, it is necessary to strengthen disclosure obligations regarding the methods of calculating SPAC merger values."