Anatomy of Special Purpose Acquisition Company (SPAC) Transaction

Here we model a live SPAC deal to illustrate the details of a SPAC transaction. We show that the SPAC structure results in severe dilution of the value of SPAC shares: post-merger share prices fall, and price drops are highly correlated with dilution or cash shortfall. We show that SPAC investors bear structural cost of the dilution and pay for companies they bring public. SPAC creates substantial costs, misaligned incentives, and losses for investors who own shares at the time of SPAC mergers: SPAC shares tend to drop by one third of their value or more within a year following a merger

Only those who buy shares in SPAC IPOs and either sell or redeem their shares prior to the merger do very well. We demonstrate that IPO investors who are pre-merger shareholders should exit at the time of the merger, either by redeeming their shares or selling them on the market. Investors that buy later and hold shares through SPAC mergers bear the costs of the generous deal given to IPO-stage investors. Sponsors promote, underwriting fees, and dilution of post-merger shares caused by SPAC warrants and rights all transfer value from SPAC investors to pre-merger IPO investors and sponsor. Modelling a transaction shows that Sponsor has an incentive to enter a losing deal for SPAC investors if its alternative is to liquidate.