More Korean companies eying SPAC mergers to raise funds

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A growing number of South Korean companies are going public by merging with a special purpose acquisition company (SPAC), with such mergers hitting an all-time high at the end of August. A SPAC is a nominal entity formed to merge with a private company that has no actual business operations. Analysts note that more companies are choosing to take a detour instead of a direct listing due to the worsening fundraising environment, including those for initial public offerings (IPOs) and investments, and the rising number of SPACs listed by brokerage houses this year.

According to the Korea Exchange on Sunday, 27 preliminary review requests were filed for SPAC mergers between January and August this year, up 68 percent from 16 a year ago. The number of SPAC merger applications is the highest since the SPAC merger system was introduced in 2009, with this year’s figure surpassing 2017’s record of 26. Given this upward trend, some even predict that the number of SPAC mergers could exceed 30 this year.

The securities industry attributes the rise in SPAC mergers to the challenging funding environment for companies.

The large number of SPACs listed by brokerage firms is also considered a major factor for the increase in SPAC mergers. SPACs are required to merge with a private company within three years of listing or be delisted and return the principal plus interest to shareholders. Last year, 45 new SPACs went public, a steep increase from 30 in 2019, 19 in 2020, and 25 in 2021.

“An increasing number of companies prefer mergers with SPACs as it makes listing relatively easy,” an official from the securities industry said. “Many SPACs went public last year, and since they will be liquidated unless they find a merger partner by 2024 they are actively looking for one this year.”

However, concerns over investor losses are also being raised as an increasing number of companies apply for SPAC mergers. Although the SPAC merger scheme was introduced to help promising companies raise funds in a timely manner, even during market downturns, caution is advised as the corporate value is more likely to be inflated in SPAC mergers compared with direct IPOs.

In a direct IPO, institutional investors analyze and evaluate the corporate value during the book building process to set the public offering price. The response of individual investors can also be gauged through public subscription. However, this is not the case for SPAC mergers, where the merger ratio and price are determined by the absolute enterprise value without any comparison. The price that comes out of talks between the lead manager and the issuer is approved at a shareholder meeting, but the price is highly likely to be overrated.

“When overvaluation becomes an issue even in IPOs that are assessed by institutions with expertise, the corporate value is much more likely to be overvalued in SPAC mergers that do not go through this process,” an industry official said.

Seven out of 11 companies that went public this year via a SPAC merger saw their stock decline from their initial offering price on the first day of trading. Six saw their stock price fall from their initial price at the close of trading on Friday, indicating that more than half of the stocks remain sluggish.

In contrast, only nine out of 48 companies, excluding SPACs and real estate investment trusts (REITs), that went through the IPO process this year saw their stock fall below the offering price on the first day of trading, with more than eight out of 10 companies seeing their stock price rise. In addition, 16 companies saw their share price fall from the IPO price on Friday, with more than six out of 10 stocks still above their IPO price.

Earlier in March, the Financial Supervisory Service (FSS) also called for caution in the selection and evaluation of SPAC merger targets. The authority warned that the forces leading these mergers could prioritize merger success over adequate evaluation, suggesting an issue of conflict of interest. To protect investors, the FSS now requires the disclosure of additional information, such as past SPAC history, for brokerage firms while deliberating on measures to hold them accountable for any violations.