Impact of SPAC Redemption Rates on Subsequent Share Prices
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In my last post (Tech SPAC Redemption Rates), I explored the factors that most directly influence redemption rates for SPACs. Here, we look forward from the redemption deadline, through the closing of the SPAC and private company reverse merger process, and on to the subsequent share price performance. As we might expect, companies that experience low redemption rates show better subsequent share price performance than do those with high redemption rates. This is the part that is too often overlooked by private companies in the SPAC process: it’s easy to become so focused on becoming public that we lose focus on being public.
Looking at a specific company in the share price chart below, for the period between the announcement and the redemption deadline, we see a share price trajectory that is likely to lead to a high redemption rate. The share price never trades above the $10/share in the SPAC trust account. This is consistent with public market consensus opinion that the ascribed enterprise value — disclosed in detail at the time of the announcement — was too high. In defense of the principals in this particular transaction, it was likely negotiated in early 2021, when market sentiment was decidedly more buoyant regarding SPAC transactions. Nevertheless, without trades above $10/share there is little opportunity for longer-term investors to become shareholders.
The resultant redemption rate in this particular company was 94.4%. We can simplistically summarize this as, the market felt that taking $10/share in cash from the trust was more attractive than being a longer-term shareholder. Looking at the same company’s share price performance beyond the time of the SPAC close, below, would suggest that the market made the right decision — at least through to this point in time. As is usually the case, the financial markets are fairly good in aggregate at assessing the fair price of a company.
The chart below plots the recent share prices of all 130 newly public companies that closed their SPAC transactions in 2H ’21 vs the redemption rate for each of those SPAC transactions. An R-Squared of 0.19 is consistent with a meaningful correlation between the redemption rate and subsequent share price of the newly public companies. The Technology SPAC subset (35 closes in 2H ’21) shows a similar correlation.
It is generally surprising to find a way to meaningfully predict future stock prices, since it suggests an arbitrage opportunity that should get competed away. But in this instance, it would be difficult to profit from the predictive power of the correlation observed above. If one shorted SPAC shares and attempted to hold that short position through a high redemption event, it would be difficult/costly to maintain the borrow when more than 90% of the float disappeared overnight. And, those that have attempted to establish a short position immediately after the close in a high redemption SPAC have sometimes found themselves in an uncomfortable short squeeze situation with a very small float in the days after the close.
Conclusion
While there is a dilution factor advantage for the private company shareholders in pushing for the highest possible valuation in their deal with a SPAC, there are also significant downsides associated with the high redemption rates and post close stock price declines associated with a valuation the public market views as too high. For companies pursuing the SPAC path for reasons other than fundraising (eg, liquidity path for existing shareholders, M&A currency to enable an acquisition strategy, claiming top position in a category, etc.), it is particularly important to set the valuation such that the share price trajectory subsequent to closing is in a positive direction. It is good remind oneself that the final arbiter of price is the public market, not the aspirations of the existing shareholders, nor the valuation opinions of the SPAC sponsor.
