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Researchers looked at how recent PSPC mergers unfolded

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The PSPCs had an exceptional race. In 2020, PSPCs raised more liquidity than in the previous decade, accounting for about half of the total IPO funding. As 2021 approaches, the trend is not stopping. However, despite the influx of cash, have the post-merger PSPCs been delivered to investors?

Researchers from Michael Klausner and Michael Ohlrogge of Stanford and New York University examined 47 PSPCs that merged between January 2019 and June 2020. This is a relatively recent cohort of PSPC. They found that PSPCs tended, on average, to lose a third of their value after the merger, although some notable exceptions produced positive returns.

Researchers believe that the main problem is the high fees associated with PSPCs. First, there is the promotion fee, which is the most well-known and usually the most important item. However, there are other considerations. The initial sales charge for PSPC is typically around 5% and the implied cost of issuing the warrants may also add up.

It is important to note that if certain shares are redeemed during the merger process (i.e. returned for cash) as typically happens, then many of these PSPC costs do not change and redemption rates do not change. high costs may therefore lead to higher costs borne by the smaller number of remaining shareholders. The researchers find that the magnitude of these costs then creates significant headwinds for the ability of post-merger PSPCs to generate significant returns for shareholders, on average.

That said, cost reductions are not unique to PSPCs. IPOs also have direct and indirect costs, the researchers point out. There is no such thing as a free way to market a business. However, PSPC costs tend to be higher, on average.

The example of the twelve seas

For example, Twelve Seas Investment Company is given as an example, where the researchers claim that, given a repayment rate of 82%, the dilution was estimated at 254% of the cash delivered as part of the merger. . It’s certainly high, but it shows how PSPC costs can increase for the remaining shareholders if buyout rates are high.

The quality filter

However, despite the generally dire numbers, quality filters can help PSPC investors somewhat. If the sponsor is affiliated with a reputable fund with more than $ 1 billion in assets and the sponsor (or PSPC manager) is a former executive, such as a CEO or president, of a Fortune 500 company, then the PSPC returns after the merger. looks better and the researchers called these fusions high quality.

About half of the 47 PSPCs analyzed met this definition and the returns for this group were significantly higher over the 3, 6 and 12 month periods after the merger, although about half of this more exclusive group actually did , lost money for investors.

In addition, even the mergers in this high-quality group that performed relatively better still lost money over a 12-month window in absolute terms in terms of average and median performance and against an index of Initial Public Offering. The only saving grace is that the average return exceeded the Russell 2000 for this group. Although among the companies examined, not all had reached the 12-month mark yet, so the data could change over time. The implication is not that the returns for the so-called high-quality group were unambiguously good, but that they were certainly less bad than for other PSPCs.

Implications

These research results are not encouraging for PSPC investors. This shows that being a more discriminating PSPC investor in high-quality PSPCs can improve your returns, although that said, the costs associated with PSPCs can be difficult to overcome even with a strong merger candidate.

As the number of PSPCs continues to grow, it will be interesting to see if even the so-called high-quality PSPCs can deliver significant returns as the market potentially becomes more competitive.

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