Last month, Atlas Crest Investment Corp, a blank-check firm created by investment banker Ken Moelis, spectacularly lopped $1 billion off the enterprise value off its $2.7 billion deal with flying taxi company Archer Aviation. Several factors contributed to this reset, including an intellectual property dispute with a rival and the fact Archer has yet to finish developing a fully operational prototype or agree to certification requirements with regulators, according to this filing.
Notably Atlas also cited the general turbulence in the market for special purpose acquisitions companies, specifically how many SPACs are trading under the value of their cash holdings — typically $10 a share — and the increase in what are called redemptions. That is, more investors are asking for their money back rather than funding SPAC mergers.
The two things are closely related. If SPAC shares fall below
$10 it makes financial sense for shareholders to redeem their holdings for cash rather than fund the merger. Atlas Crest’s stock itself was languishing below $10 at the time, like the majority of SPACS that have announced but not
yet completed deals. Cutting the deal value might help prevent significant redemptions by persuading stockholders they’re getting a better deal.
This redemption right was the secret sauce behind the boom in SPACs, which raise cash in an initial public offering before finding a promising private firm with which to combine. Investors’ ability to claw-back cash from a SPAC deal they don’t like made hedge funds feel comfortable seeding blank-check firms with billions of dollars of capital. In effect, the hedge funds can’t lose, providing they redeem
Now that investor enthusiasm for blank-check firms has evaporated amid heightened regulatory attention and some high profile flops, the secret sauce has become a potential poison. According to Spacresearch.com data, the median redemption rate for North American SPAC deals completed in July was almost 50%. In several recent deals, more than 90% of shares were redeemed.
Redemptions deprive the target of cash to help fund development and expansion plans; they can also signal — perhaps unfairly — that shareholders aren’t excited about the merger, which is a poor way to start out as a public company. Post-merger trading involving such companies has often been especially volatile as there are fewer shares available.