SPACs Fall From Favor

HFA Padded
Dr. David Kass
Published on
Updated on

mpanies in 2020 went public through mergers with SPACs. The momentum continued, and even ramped up, in the early part of 2021 with 300 SPAC-merger filings in the first quarter alone.

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However, that enthusiasm dipped sharply last month.

A factor, says Maryland Smith’s David Kass, is fear of inflation. This fear “has resulted in a rotation in 2021 from the ‘growth stocks’ that rose sharply in 2020 to ‘value stocks.’

“Higher inflation will result in higher discount rates of earnings several years into the future and therefore lower valuations for growth companies relative to value companies that have more predictable short-term profits,”says Kass, clinical professor of finance in the University of Maryland’s Robert H. Smith School of Business. “SPACs primarily focus on relatively young, rapidly growing tech companies.”

The enthusiasm in 2020 for SPACs and growth stocks, Kass says, also led to an oversupply of SPACs relative to the number of attractive private companies available to be merged with a SPAC. “As a result of near-zero interest rates, SPACs face a lot of competition from private equity firms as well as other large investment firms.”

Sponsors of SPACs “face a risk/reward profile that is very appealing, with the possibility of earning very high returns with almost no risk,” Kass adds. “By contrast, small (retail) investors face a very different risk/reward profile, with a low probability of earning a profit and very high risk of incurring losses.”

“Completed mergers between January 2019 and June 2020, lost 12% of their value within six months following the merger, while Nasdaq rose about 30%,” says Kass, citing a recent analysis from The Wall Street Journal. “The 20% stake that sponsors get for free resulted in returns on investment of more than 500% as of the end of 2020.”

However, the bloom appears to be off the vine now for many, where SPACs are concerned.

“Most companies are choosing the IPO or direct listing path to go public rather than SPACs,” Kass says. “SPACs have performed very poorly in 2021 as the demand by small investors has dried up.”

Article by Dr. David Kass

HFA Padded

David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.