SPAC Listing Operating Profit Estimates Fall Short by 58.7%... Financial Supervisory Service Revises Overvaluation Calculations

On the 7th, the Financial Supervisory Service (FSS) announced that it will review the current status of operating performance estimates for SPAC-listed companies and improve necessary aspects to ensure reasonable estimations. This comes amid ongoing concerns that the future operating performance of companies listed through SPAC mergers is being excessively overestimated, leading to an overvaluation of corporate value (merger price).

In fact, an analysis by the FSS of the sales and operating profit estimates of SPAC-listed companies (139 companies listed from 2010 to August 2023) revealed that the average estimated sales were 57.1 billion KRW, while the actual sales were 46.9 billion KRW, falling short by 17.8%. The average estimated operating profit was 10.6 billion KRW, but the actual figure was 4.4 billion KRW, falling short by 58.7%. Additionally, the proportion of companies with sales below estimates averaged 76.0%, and those with operating profits below estimates averaged 84.1%. There were also cases where future business environments were overly optimistically projected to estimate operating performance.

The value of SPAC-listed companies is calculated as a weighted average of income value, which discounts future operating performance to present value, and asset value, which adjusts net assets from the most recent balance sheet by adding or subtracting adjustment items. Asset value is objectively calculated based on the balance sheet, but income value varies significantly depending on the estimated future operating performance.

The FSS pointed out, "Sponsors (such as securities firms) and external evaluation firms (accounting firms) should play a role in preventing overvaluation of corporate value, but it appears that their efforts to protect investors have been considerably insufficient, prioritizing merger success and business acquisition for their own benefit." It added, "As a result, when corporate value is overvalued, unfavorable merger ratios are applied to SPAC investors, ultimately leading to investor losses."

Accordingly, the FSS plans to strengthen disclosures such as accounting firms' evaluation histories and promote the increased use of relative valuation. The FSS explained, "We intend to improve the preparation format so that post-operating performance information of SPAC-listed companies (differences between forecasts and actual results, reasons for differences, etc.) is thoroughly disclosed." It also stated, "To complement the shortcomings of methods like discounted cash flow, we will pursue institutional improvements to enable more active use of relative valuation." Previously, on the 6th, the FSS held a meeting with accounting firms urging strict external evaluations.

The FSS stated, "We will promptly implement institutional improvements such as revising corporate disclosure form preparation standards and activating relative valuation comparative disclosures, and strengthen reviews by closely examining whether sufficient grounds for future operating performance estimates have been provided." It added, "In the future, we will actively identify and address areas that need improvement to enhance the objectivity and reliability of future estimates."

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