SPAC VS "Ordinary" Reverse Merger

Long before SPACs became a big hit on Wall Street, there were “ordinary” Reverse Mergers on the Nasdaq & NYSE with small operating companies that no longer had a need to be public.

Generally these mainboard listed “shell” companies were older companies which no longer awarded the same valuations as they did in their glory days 20-30 years ago.

Although there are still few “ordinary” Reverse Mergers approx. 10-15 each year conducted on both the Nasdaq & NYSE.

Since all the media attention is focused on SPACs today and not “ordinary” Reverse Mergers, they mostly go unnoticed by the media.

SPACs look and sound great from the outside, but to insiders that truly understand how they work, it may not look as attractive.

Some of the cons associated with SPACs include:

1. SPACs come with a lot of dilution. Usually 20% just for the Sponsors of the SPAC and another 10-15% between the Underwriters and the SPAC investors depending on the structure.
2. Although a SPAC might have let’s say $500M in the company, a high majority of that money ends up going back to the original investors when they redeem their shares prior to the merger.
3. SPAC investors are not very incentivised to actually stay in the deal post-merger as they usually get free warrants (typically at $10) regardless if they actually keep their money in the deal.

Some of the pro’s associated with merging with an “ordinary” Reverse Mergers include:

1. Maximum dilution of 5-10% upon the merger.
2. No need to worry about Warrants or Options adding to future dilution post-merger.
3. Once merger is completed, the company can raise money at a much higher valuation with less dilutive terms.

There have been some pretty famous “ordinary” Reverse Mergers over the years, most notably Berkshire Hathaway, New York Stock Exchange, Texas Instruments, VM Ware, Jamba Juice etc.

In summary the lure of a SPAC with $200M into sounds amazing to any private company, but what happens when only actually 10% or $20M is left post-merger which translates in 30-40%

As in most cases the numbers never lie, so let’s now take a look at the historical data of SPACs.

Fortune recently reported:

"Looking at it another way, Renaissance Capital's Kennedy notes that based on his data, 70% of SPAC IPOs so far this year are trading below their $10 offer price (that's through September 15, and includes those that have announced and a few that have completed mergers). And of the SPACs that have completed mergers in 2021, 58% trade below their original offer price, according to Renaissance data.
Moving forward, "the SPACs in the pipeline will have a harder time raising IPO capital compared to early 2021, due to a broad-based decline in SPAC returns and greater regulatory scrutiny from the SEC," per a September report from Renaissance Capital."

fortune.com/2021/09/16/spac-returns-ipos-goldman-sachs/