Special purpose acquisition companies (SPACs) have raised around
$22bn from investors since 2003, and comprised 20% of total funds
raised in US IPOs in 2007. SPACs are interesting structures – allowing
investors a risk-free option to invest in a future acquisition. However,
we show that more than one-half of approved deals immediately
destroy value. Investors, who can observe the market’s view of the
proposed deal, as well as that of the founders, should listen to the
market, since the extreme incentives faced by the SPAC founders create
corresponding conflicts of interest. We propose a simple, observable
rule – based on market prices – which investors should heed.
Keywords: SPACs, cash shells, IPOs, private equity.