An Insight into SPACs and their Valuation Conundrum

Abstract

There has been a great deal of SPAC activity in the last year and a half, but there are still a lot of unknowns in the dynamics of a SPAC deal. In this paper, I explain Special Purpose Acquisition Companies (SPACs), their origins in the 1990s and evolution to current status, celebrity endorsements, and resultant SPAC bubble. A recent SPAC acquisition – ARBE Robotics’ acquisition by ITAC, a publicly-traded SPAC is used as an example of the valuation conundrum faced by SPAC sponsors. The findings summarized in this paper are arrived from analyzing publicly available data. I perform a valuation analysis on the deal above and try to reconcile the values used in the investor presentation to 2 commonly used valuation methodologies that highlight the lack of correlation of valuation to value. It is important to note that the majority of business combinations associated with SPACs have no requirement for independent valuation opinions. My findings indicate that this lack of requirement is going to lead to more failures and losses for investors in SPACs and therefore public investors in SPACs should refrain from investing in their IPOs. Public investors are advised to wait till after the business combination is announced despite the benefits associate with warrants in the IPO units. I analyze recent SEC guidance on warrants and how that will limit future SPAC deals. This paper argues that SPACs have recently lost investor interest as they have come out of the positive feedback cycle due to negative media coverage, SEC focus, expected regulation tightening, and weak returns in the past year.