More Than 25% of the Companies That Merged With SPACs During the Boom Are Penny Stocks Now

Buzzfeed isn't the only company that merged with a SPAC that's hurting. Of the 365 companies that listed publicly through a SPAC merger between 2020 and 2022, 100 -- or 27% -- were penny stocks trading below $1 as of Thursday's close, according to data firm SPAC Research. From a report: Among the companies now in the cents-per-share club: WeWork, scooter rental company Bird, and aspiring electric vehicle makers including Nikola, Lordstown Motors and Faraday Future. Two-thirds of companies -- 248 -- are under $5 a share, a steep drop from SPACs' standard $10 initial listing price. SPACs, or special purpose acquisition companies, are publicly-listed blank check companies that are intended to merge with private companies and bring them public. Normally a tiny sliver of the financial sector, SPACs exploded in popularity when the markets turned particularly frothy and investors rushed into fast-growing, money-losing young companies. Startups that were years away from producing revenue were able to woo public investors with ambitious goals and revenue projections. Those projections are now being missed en masse. Of those that completed SPAC mergers during the boom, just 28 -- or 8% -- are trading above their initial listing price, according to SPAC Research. Another 28 aren't listed anymore, generally because they were bought by another company or went out of business.

Buried the lede

[nategasser]

I feel like the fact that only 8% are trading above their initial offer price is more significant than 25% trading below $1.

Those odds would never be allowed in a casino.

Re:

[istartedi]

Anybody who's paid attention to Wall Street knows IPOs are an exit strategy for the real winners. There's a long line of people who want to sell after the lockout period. If you're interested in an IPO, it's almost never a good idea to buy before the lockouts expire. Every once in a while you get something like Amazon where it doesn't matter when you bought as long as you hold for 10-20 years; but it's the exception that proves the rule.

When people ask me about a stock, I usually hedge and say, "don't bl

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[whoever57]

Some are being propped up with stock prices completely unjustified by their assets. For example, why is DWAC not a penny stock? It has had problems paying its bills, which suggests that it doesn't have any money. It hasn't been able to acquire Truth Social which was its reason for existing.

There is no basis in reality for its current stock price.

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[shanen]

I think you were trying to prove your journalistic cred with "lede", but in this context "lead" appears to be the correct form. Or maybe it's another joke sailing over my punkin' head? I had to research "lede" versus "lead"... (But still not a bad FP.)

However the "lead angle" I was looking for involves TFG's business plans with a SPAC... My current understanding is that his very special version of the truth is being flailed skinless even before the planned SPAC merger happens. (More general question is if a

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[Anonymous Coward]

Lede [dictionary.com] is correct:

lede or lead [ leed ]SHOW IPA College Level noun Journalism. a short summary serving as an introduction to a news story, article, or other copy. the main and often most important news story.

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[ceoyoyo]

For the stage most of those companies were in, 8% is pretty good. You have no idea what the odds are, because you don't know what the upside is, nor what the distribution of value is, and the wheel hasn't even stopped spinning yet.

Lucid is trading at around $50, and a few others are over $20, and that's only a couple years out.

Just 25%?

[Kunedog]

SPACs, or special purpose acquisition companies, are publicly-listed blank check companies that are intended to merge with private companies and bring them public. Normally a tiny sliver of the financial sector, SPACs exploded in popularity when the markets turned particularly frothy and investors rushed into fast-growing, money-losing young companies. Startups that were years away from producing revenue were able to woo public investors with ambitious goals and revenue projections. Those projections are now being missed en masse. Of those that completed SPAC mergers during the boom, just 28 -- or 8% -- are trading above their initial listing price, according to SPAC Research. Another 28 aren't listed anymore, generally because they were bought by another company or went out of business.

Sounds like an extremely high-reward (if not "counting on becoming a monopoly in an as-yet non-existant market") type of investment. There's another high R-word that usually goes along with that . . .

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[arglebargle_xiv]

For people who are still a bit unclear about what a SPAC, which is never explained in the summary, is, here's a video explanation by Kylie Mole [youtube.com] (although there's a lot of other material there other than SPAC).

Expected outcome

[Enigma2175]

SPACs are designed for companies that want that sweet, sweet stock market money but don't want the financial transparency that goes with an IPO. The only reason to use one is because you have shady shit going on with your financials, anyone who actually invests in one is a fool. These companies losing the majority of their stock value is an expected result, the people running it have already cashed in and the retail investors are the ones left holding the bag.

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[Ed Tice]

I think you are mixing up the acquirer and the acquired. An acquiring SPAC starts out in a bad spot because they raise a bunch of money to buy *something* but don't yet know what. There's a huge cost of time, money, and embarrassment if nothing gets purchased. So they end up buying things that aren't all that attractive.

For the company being acquired, they would normally prefer to do their own IPO but have determined that they can't do so with much success. Hence why they might decide that getting acqu

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[micheas]

Companies that go public via a SPAC would have generated more revenue for the company if they had gone public via a traditional IPO.

The reason to go public via a SPAC is that you can't handle the paperwork of a traditional IPO. They are all companies that are not ready to go public. A small percentage of them grow to the point that they are capable of being a public company. Many never make it.

For an example of this, look at Sharecare which went public via a SPAC and was late filing their 10Q because they

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[Ed Tice]

You are misunderstanding how SPACs work. You can't "go public via a SPAC." Such a thing doesn't exist. You can either (a) go public or (b) get bought by a SPAC which is already public. In the former case you do a lot of paperwork, pay underwriters, and *maybe* go public. There might not be enough interest or not enough interest at a price that it makes sense to complete the offering. Alternatively you can find a SPAC and try to get them to buy you or, maybe, a SPAC will come to you. But a SPAC is *no

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[will_die]

You still have the file the regular stock reporting duties, after all the parent company or the one you merged into has to do that.
The benefit and why a bunch of companies switch to it was that the delay of selling the stock that exists with an IPO does not exist with a

What about the other 75%

[scourfish]

Because if there is a 75% chance of success, that's not bad risk.

Re:What about the other 75%

[smooth wombat]

Didn't read the story correctly, did ya? There were only 28 companies, 8%, which are trading above their initial asking price. The remainder, 337, are either below 5%, a penny stock, or out of business.

Not sure what world you live in, but 8% success is not a good risk.

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[quantaman]

Didn't read the story correctly, did ya? There were only 28 companies, 8%, which are trading above their initial asking price. The remainder, 337, are either below 5%, a penny stock, or out of business.

Not sure what world you live in, but 8% success is not a good risk.

I think 1 in 10 is supposed to be the win rate for VCs (or Angels?) though the 1 provides a 10x return so not really the same thing.

I'm guessing the issue is that SPACs are largely used as a way for companies to raise money with less scrutiny than an IPO or VC round, which somewhat predictably leads to poor investments.

And this was.. .unexpected?

[smap77]

Nice to see the numbers, but they track to other risky ventures' success.

Like as if your company's run at VC funding was coming up short and you had to turn to either a SPAC or a shady dictatorship's sovereign wealth fund.

How do these numbers compare with IPOs?

[Aristos Mazer]

Merging with a SPAC is another way of doing an IPO but with all the paperwork dealt with already. Many companies fail after IPO. Is there something about SPAC mergers that makes it more likely? We don't know because the summary doesn't say, even though it implies that SPAC merging is a bad idea. Needs more data to be complete. And the article is paywalled.

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[acroyear]

I read that as "a leveraged buyout through crowdfunding". :)

Bilk the investor rubes for the cash rather than taking out unpayable loans that leave the remnants of the company saddled with forever debt (and the inevitable Chapter 11 that goes with it).

All playing account games with money and who cares who gets hurt in the process.

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[tacomanic]

No to worry. This is all carefully guided by the SEC to insure the same level of integrity and due diligence they gave Enron and Bernie Madhoff. I have not doubt these are born out of the capital markets where you need millions to play as a way to extract money via fees before selling the crappy stock to mom and pop and continue on their merry way.

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[indytx]

I read that as "a leveraged buyout through crowdfunding". :)

Bilk the investor rubes for the cash rather than taking out unpayable loans that leave the remnants of the company saddled with forever debt (and the inevitable Chapter 11 that goes with it).

That's a really good CliffsNotes version of the whole SPAC phenomenon, but you could look at it another way. There's less SEC oversight of a SPAC acquisition than an IPO. That's really the entire point. Less oversight equals less cost equals less public information that "the market" can consider. Moreover, your seeing shorter and shorter lock-up periods for both IPOs and SPAC acquisitions, so founders and early VC people can have less and less at stake for the success of the acquired company. Truly caveat e

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[tlhIngan]

Merging with a SPAC is another way of doing an IPO but with all the paperwork dealt with already. Many companies fail after IPO. Is there something about SPAC mergers that makes it more likely? We don't know because the summary doesn't say, even though it implies that SPAC merging is a bad idea. Needs more data to be complete. And the article is paywalled.

A SPAC is basically an IPO where you don't get to look at the numbers. As in, only the people who got in early, acquire the company and then sell it make

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[micheas]

IPOs have audited financial statements, audited business risks, and business plans presented under penalty of perjury. SPACs generally have none of those things until well after they are public,

To me that is probably enough to explain the difference alone.

That didn't take long

[deoxyribonucleicacid]

Scheme to get financially unsound companies around barriers to unsound companies entering stock-market turns out to be a bad idea. More at eleven!

SPACs are whack!

[haggie]

It's like buying stock in a company running a Ponzi scheme on others.