1. Introduction

SPACs, or special purpose acquisition companies, have experienced a frenzy of activity and attention over the past year. In 2020, SPACs have already raised as much cash as they did over the entire preceding decade, with two-thirds of this cash raised in just the past three months. Press reports and blog commentary present SPACs as a clever financial innovation that provide a cheaper, faster, and more certain path to becoming a public company than does an IPO. Those reports, however, misunderstand the economics of SPACs. We have just posted a study of all 47 SPACs that merged between January 2019 and June 2020. That study addresses each of those claims. In this blog we focus on our findings regarding the cost of SPACs, which are very much at odds with the commentary one sees on nearly a daily basis.

In a nutshell, we find:

• Although SPACs issue shares for roughly $10 and value their shares at $10 when they merge, by the time of the merger the median SPAC holds cash of just $6.67 per share.
• The dilution embedded in SPACs constitutes a cost roughly twice as high as the cost generally attributed to SPACs, even by SPAC skeptics.
• When commentators say SPACs are a cheap way to go public, they are right, but only because SPAC investors are bearing the cost, which is an unsustainable situation.
• Although some SPACs with high-quality sponsors do better than others, SPAC investors that hold shares at the time of a SPAC’s merger see post-merger share prices drop on average by a third or more.
• Since the end of our study period, Pershing Square issued a SPAC with substantial improvements in the uniform structure of other SPACs. We propose, however, that more fundamental improvement is possible.

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