A few weeks before Christmas, KKR Acquisition Holdings I Corp., one of the largest special purpose acquisition companies (SPACs) ever created, announced an exit event. It just wasn’t the one anticipated when it launched in 2021. Read below to see how SPACs falling apart will drive M&A.
Shareholders would be paid back $1.2 billion; warrants, tied to KAHC shares, were de-listed.
“We did work on over 50 potential merger targets,” said the KKR SPAC’s CEO Glenn Murphy in a public filing.
“And although we came close on a number of occasions, given market conditions, we made the decision to wind-up our company and return the funds.”
The news underscored a harsh reality: the SPAC market has fallen off a cliff.
Several factors are to blame. Rising interest rates clipped risk market wings and the wind beneath them. Then there were the regulatory headwinds as well as widening chasms between what buyers and sellers consider fair value.
During the first three quarters of 2022, there were 78 SPAC IPOs, compared to 444 in the same period in 2021, according to S&P Global Market Intelligence data.
The third quarter of 2022 saw just six SPAC IPOs that raised roughly $500 million, according to PwC.
Meanwhile, an analysis of the nearly 1,300 SPACs launched since 2020 shows that 800 of them had not closed on any deal as of the third quarter of 2022, according to PitchBook.
Industry members stress the kind of opportunities that often come in the darkness before dawn. Some industry experts expect the spectacular SPAC flameout could actually lead to some old-fashioned merger and acquisition activity, the kind involving publicly traded acquirers with their sights set on late-stage, high-growth private firms previously out of reach in a frothy SPAC environment.
These are target companies which might have been prime candidates for a special-purpose-driven acquisition merely months ago but which are now essentially orphaned and devalued by as much as 50 percent, such that many are no longer considered “unicorns” (privately valued at more than $1 billion).
“Capital is still flowing into these companies because their businesses are fundamentally sound, but not at the same levels as 2021,” says Dan Siciliano, CEO of Nikkl, a Scottsdale, Ariz.-based company that specializes in investing in unicorn firms.
He views the turbulent, downward-turned market as a buying opportunity and a chance for the best-managed pre-IPO companies to not only survive this down cycle but position themselves for growth. And that’s with or without a return to SPAC glory.
“We expect significant consolidation to take place in the coming quarters, once investors and companies adjust to the new reality of their reduced share prices,” Siciliano adds. “Consolidation is a natural consequence of a downturn in the market. The best companies will acquire smaller rivals.”
SPACs were arguably the largest phenomenon of the public markets in 2021, as PitchBook has said.
The most drastic declines over the past few months have come from newly public companies, particularly the group that are characterized by high growth rates but low profitability, PitchBook says.
“The SPAC mania period saw a skew toward deals with businesses in this ‘growth’ category,” PitchBook adds, adding that this concentration has hampered both new SPAC IPO issuance and reverse merger activity.
The breakdown in the speed and certainty of the reverse merger relative to an IPO, which was a main value proposition that the new SPACs offered to private companies, drove the SPAC downfall, PitchBook says.
Deal security for the companies going forward with SPAC combinations has continued to drop, with increasing redemptions and closing negotiations now averaging upwards of six to seven months.
The IPO market is expected to heat up. This could reinvigorate the SPAC sector.
“We remain broadly optimistic about the U.S. IPO market in the coming quarters, with a number of companies kicking off public company readiness and getting in the queue,” PwC researchers said in November. “Investor preferences have pivoted from a focus on high-growth IPO candidates toward companies with sustained profitability, strong cash flow and competitive differentiation.”
Steven Siesser, co-chair of the transactions & advisory group at law firm Lowenstein Sandler, says some acquisitions and deals fell apart in 2022, as a result of regulatory scrutiny from federal agencies. The Department of Justice and the Federal Trade Commission intensified their enforcement of potentially anti-competitive practices across industries, including recent inquiries into the influence of private equity firms on corporate boards.
However, despite economic volatility and renewed regulatory scrutiny, Siesser insists that “U.S. mergers and acquisitions activity will remain strong.”
