[Spec Boom] Money Lost Its Way Flows In... Bubble Warning Signal

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[Asia Economy Reporter Yujin Cho] An economist warned on the 20th (local time) that the SPAC craze could become a bubble burst that hits the U.S. economy following GameStop and Bitcoin. Due to the continuous money supply caused by COVID-19, funds with nowhere to go are flocking to SPACs, showing signs of overheating. SPACs inherently carry risks as they involve mergers and acquisitions (M&A) of companies seeking to avoid entering the stock market through a normal initial public offering (IPO). The inflated bubble could collapse instantly if interest rates rise due to inflation.

This year, the number of SPAC listings on the U.S. stock market has reached 151, already surpassing half of last year's total (248). According to Japan's Nihon Keizai Shimbun, the total value of SPAC mergers this year reached $78.8 billion (approximately 87 trillion KRW as of February 9), exceeding the record quarterly high of $70.4 billion in the third quarter of last year.

◆ 17 months via IPO vs. 5 months via SPAC... The epitome of a shortcut? = SPACs raise funds through public offerings and get listed on the stock market, then merge with an unlisted company within a predetermined period (2 years). For unlisted companies, listing through a SPAC offers the advantage of shortening the listing process compared to a formal IPO. Due to increased market volatility caused by COVID-19 last year, more companies seeking rapid listings have fueled the SPAC IPO craze. Last year, the number of SPAC listings on the U.S. stock market reached 248, four times that of the previous year.

The biggest problem with SPACs is that non-qualified, marginal companies can enter the stock market through them. Nihon Keizai Shimbun diagnosed that "companies that have failed normal IPOs could exploit SPACs as a backdoor." A representative example is the U.S. office-sharing company WeWork. WeWork's IPO was canceled in 2019 due to governance and accounting fraud issues revealed during the process. Subsequently, it faced bankruptcy risks due to cash shortages, and after its valuation dropped to one-fifth, it is currently pursuing a backdoor listing through a merger with a SPAC linked to Bow Capital Management.

◆ Regulatory loopholes estimating valuation based on 'future performance' = Unlike normal company listings, SPACs base valuations on 'future performance,' which can significantly inflate the valuation. Nikola, which listed on the U.S. stock market through a SPAC merger in June last year, saw its stock price surge to $80, eight times the IPO price ($10), but plummeted to the $20 range amid fraud allegations. Market rumors of mergers with promising companies drive up stock prices, but it is rare for companies to sustain themselves after the merger. Among 58 companies listed through SPAC mergers last year, 60% had stock prices below the S&P 500 index after the merger.

In response to these loopholes, the U.S. Securities and Exchange Commission (SEC) is also moving to prepare regulations related to SPACs. Jay Clayton, former chairman of the U.S. SEC, said, "We are closely monitoring whether SPACs undergo the same rigorous disclosure procedures as IPOs for stock market entry."

The two-year validity period of SPACs also acts as a blind spot. Joseph Pass, an analyst at U.S. asset management firm T. Rowe Price, pointed out, "If a SPAC fails to find a target company within its two-year validity period, it dissolves and compensation becomes zero. Therefore, completing a merger within the validity period becomes the absolute goal of a SPAC rather than selecting a high-quality target company." Hims & Hers Health chose a backdoor route by merging with the SPAC 'Oaktree' listed on Nasdaq, reducing the listing process that usually takes 1 to 1.5 years to just 4 months. Through this, they successfully raised a total of $1.6 billion in funds.

This content was produced with the assistance of AI translation services.