SPACs will drive $300 billion in M&A activity over the next 2 years after a monstrous 2020, Goldman says
- Blank-check companies, or SPACs, looking for their next target could drive $300 billion in mergers and acquisitions over the next two years, according to Goldman Sachs.
- A hunt for yield, a shift in focus from value to growth stocks, and retail investors' search for early-stage businesses drove investor interest in SPACs in 2020, strategists said.
- "If this year's 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion," they said.
- The strategists said weak returns represented one headwind to future SPAC issuance.
- Visit Business Insider's homepage for more stories.
Blank-check companies looking to merge with or acquire another company could drive $300 billion in M&A activity over the next two years, Goldman Sachs said on Monday.
About 205 special-purpose acquisition companies have raised a record $70 billion in initial-public-offering proceeds this year, representing a fivefold increase from 2019, strategists led by David Kostin wrote. SPAC initial public offerings this year accounted for 52% of the $124 billion raised via 356 US public offerings.
Three major factors drove investor interest in 2020, or what the strategists called "the year of the SPAC": a shift in focus from value stocks to growth stocks, retail investors who were keen on nontraditional and early-stage businesses, and a hunt for cash substitutes when key policy rates were near zero.
Goldman estimated that 205 SPACs would need to acquire a target in 2021 or 2022, based on their 24-month post-IPO expiration dates.
"If this year's 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion," the strategists said.
SPACs are a cheaper and faster alternative to the traditional IPO route, as they are created solely to merge with or acquire other businesses and take the merged entity public. After an SPAC goes public, it could take up to two years to find a desirable target. If it doesn't, the SPAC is liquidated, and funds raised are returned to investors.
In 2020, prominent entrepreneurs, hedge-fund managers, and celebrities - such as Bill Ackman, Richard Branson, Michael Jordan, and Shaquille O'Neal - became involved in SPACs, and the blank-check firms were led to market by investment banks like Morgan Stanley, Credit Suisse, and Goldman Sachs.
"We expect a high level of SPAC activity will continue into 2021," Goldman Sachs said, adding that weak post-acquisition returns represent a headwind to future SPAC issuance.