This post was originally published on July 5, 2022 and was updated for relevance on July 29, 2024.

In 2023, despite a record number of liquidations, the SPAC market continued its sharp decline, with IPOs dropping by 64% compared to 2022. The average gross amount was just $124.1 million–a near-third of the record-breaking $336.2 IPO proceeds seen during the pandemic-driven SPAC boom of 2020 and 2021.

SPACs, once viewed as a simpler route to accessing public market capital, have faced several challenges leading to their continuously disappointing performances, including an influx of newly de-SPAC companies, heightened SEC (Securities and Exchange Commission) scrutiny, economic uncertainty, and rising interest rate volatility. This article will examine the SPAC IPO phenomenon, which gripped capital markets for the past decade, exploring their fundamental differences, processes, the 2024 outlook, and more.

Why are SPACs so popular?

Even with the disclosures listed above, a deal of this nature will have inherent risks. Still, SPACs or direct listings have become the norm in recent years. Multiple theories explain their appeal across Wall Street's trading floor, shareholder boardrooms, and media news outlets.

First, we've already mentioned how SPACs offer a faster, less burdensome way for privately operating companies to access public investor capital. Additionally, they deliver more flexibility, less dilution, and certainty regarding valuation in volatile market conditions. Second, the SPAC boom has led to numerous intermediaries providing services unavailable 20 years ago. And third, the high volume of SPACs creates momentum, making it a more viable option for managers and investors.

The process of going public via IPO

Generally, an IPO takes between 12 and 18 months and involves intermediaries like investment banks, which act as underwriters for the deal. The lead-up to the IPO formation is a series of meetings with SEC regulators and investors. During this IPO roadshow, the investors commit to acquiring a certain amount of stock at an agreed-upon share price. The market's reaction on the day the company goes public will partially determine its long-term valuation.

1. IPO Preparation (6-12 months):

Companies begin with preliminary work to develop a prospectus, conduct due diligence and financial audits, and improve corporate governance, assembling a team of advisors, including investment banks, lawyers, and accountants.

2. Filing and SEC Review (3-6 months):

The company will file its registration statement and prospectus with the SEC, which reviews the documentation. The back-and-forth can take several months as they may provide comments or request additional information

3. Marketing and Pricing (1-2 months):

The company and its underwriters conduct a roadshow, an intensive period of presentations and meetings to market the IPO to potential investors. Based on their feedback, a final IPO price is set.

4. Going Public (1-2 weeks):

After addressing all SEC comments, the company receives approval, and the registration statement becomes effective. On its opening day, the company lists its shares on a stock exchange, and trading begins.

The process of going public via SPAC

It’s often incorrectly stated that a SPAC takes 2-3 months to go public. This timeline only represents the period for creating the shell company and investing funds. It will take them an additional 18-24 months to identify a target company. Still, the process is much simpler as the company goes public immediately after closing the deal. Remember, the SPAC must return all funds to its investors if a company isn’t acquired or merged within the two-year limit.

1. SPAC Formation (2-3 months):

Its sponsors create the SPAC, and initial preparations are made to develop a business plan, make announcements, etc. Before identifying a target, the management team or sponsors can start selling SPAC shares and raising capital through its IPO, which is relatively straightforward compared to a traditional IPO since the SPAC has no operations and minimal disclosures.

2. Target Search and Acquisition (12-24 months):

The SPAC will have a defined period, commonly 18-24 months, to find and negotiate a merger with a target company. Once a target is identified, the management team will present the proposed SPAC merger to the shareholders, who will vote to approve the transaction. Once the acquisition is finalized, the private company becomes publicly traded through the SPAC.

Pros and Cons of Going Public via SPACs

SPAC advocates who recommend this route emphasize the following benefits.

• Cost: The cost of going public through a SPAC is usually lower than that of an IPO.
• Speed: The process is typically faster than an IPO if the team successfully completes the acquisition or merger.

• Regulatory Burden: SPACs involve significantly less paperwork compared to IPOs, which often require extensive documentation
• Valuation: Investors have a better sense of their stake in the publicly listed company, unlike an IPO valuation that fluctuates on its opening day.

Critics tend to cite the following drawbacks.

• No Transparency: SPAC investors do not know the specific company their funds will target, including its potential cash flows, opportunities, and marketing potential.
• Conflicts of Interest: When managers are given funds to acquire a company, there is a risk of significant conflicts of interest. They might acquire a business owned by a family member or overpay for a company, serving their interests rather than the investors.

• Compressed Timelines: Managers must acquire or merge with a company within 24 months or return investors’ funds. This tight deadline can pressure managers into making hasty decisions they might otherwise avoid.

Examples of SPACs that went public

SPACs became very popular recently, particularly in 2020 and 2021, due to their perceived advantages in an unstable market environment. High-profile SPAC mergers included companies like DraftKings, Lucid, and WeWork.

In July 2021, electric vehicle maker Lucid announced a SPAC merger with Churchill Capital Corp. IV, valued at slightly over $12.2 billion. After its initial listing period on NASDAQ, Lucid’s shares soared to $60 but subsequently trended downwards, reaching a market capitalization of about $33 billion. Still, this was seen as highly respectable as the company nearly tripled the return on investment within a year of the acquisition.

DraftKings is a leading sports betting and fantasy sports company that went public in December 2019 through an SPAC merger with Diamond Eagle Acquisition Corp and SBTech, a sports betting technology provider. The transaction was completed in April 2020, resulting in a combined company value of $3.3 billion.

WeWork, the infamous office-sharing company,  experienced one of our time’s most notorious SPAC failures. In an October 2021 deal, the unicorn had a $9 billion valuation, benefiting from pre-pandemic low interest rates. Two years later, the company filed for Chapter 11 bankruptcy protections. 

Examples of IPOs that went public

Rivian, Reddit, and StubHub utilized their IPOs to access public markets, raise substantial capital, and position themselves for future growth in their respective industries.

Rivian provides an exciting comparison to Lucid, as it, too, is an electric vehicle manufacturer, but it chose to go public through a traditional IPO. Its inventors, including Amazon and the Ford Motor Company, made it easy to sell during its IPO roadshow. The company went public in November with a valuation of $66.5 billion. Since then, its share price has consistently trended downward despite an impressive sales pipeline and favorable government policies. At the time of our latest update, its value was 16.67 billion, a quarter of what it once was, and EV adoption remains stagnant.

Reddit's popular online forum went public on March 21, 2024, after its IPO raised $748 million at $34 per share, achieving a valuation of around $6.4 billion. The company has over 73 million daily active users and over 100,000 active communities, primarily relying on its advertising revenue, premium membership subscriptions, and data licensing agreements. 

The online ticket exchange and resale company StubHub first announced its plans to go public in October 2022, aiming to capitalize on the post-pandemic surge of live ticketing events.  StubHub is targeting a valuation of $16.5 billion; however, recent market conditions have forced them to strategically delay their IPO until September 2024. It'll contend with concert fatigue as consumers nationwide change their spending habits due to increased living costs, ticket resellers and bots driving up prices, and potential lawmaker regulations pending a DOJ antitrust lawsuit.

2024 SPACs Outlook 

On the surface, these examples above illustrate how SPACs may present a speedy way to make money, while IPOs can quickly devolve into a bureaucratic nightmare. However, neither guarantees strong investor returns. The outlook for SPACs in 2024 isn't bleak, but investors should be somewhat cautious for the following reasons.

1. Regulatory Changes: 

Increased scrutiny and regulatory changes will reshape the SPAC environment. The SEC has introduced rules to enhance transparency and protect investors, which might affect SPAC activities.

2. Market Conditions: 

The broader market conditions and investor sentiment are crucial. SPACs have faced challenges due to industry instability, political tensions, and economic uncertainties that could influence the number of new SPACs launched and their success rates.

3. Sector Focus: 

SPACs will likely continue focusing on specific sectors with perceived growth potential, such as AI and machine learning technology, healthcare, and clean energy.

4. SPAC Maturation: 

As more SPACs reach the end of their initial timeframe, successful deals may consolidate, reducing the number of SPACs seeking targets.

Regardless of the route a company takes to go public—a traditional IPO or a SPAC—the fundamentals of generating value still apply. The best SPAC managers will thoroughly evaluate all aspects of the potential mergers. DealRoom's comprehensive M&A software supports this by streamlining due diligence and integration of SPAC processes, improving transparency, team collaboration, and effective communication. Our M&A Optimization Platform's capabilities ensure teams increase deal efficiency to execute optimal transaction closures.