Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2><strong>KEY HIGHLIGHTS</strong></h2>
<p><strong>SPACs in numbers</strong>:&nbsp;A record breaking 2021 ended with the completion of 613 SPAC IPOs, approaching 2.5X the number recorded in 2020, which itself had shattered previous records. Much of this was concentrated in the front-end of the year, with 298 SPAC IPOs, or 48% of the 2021 total, coming to market in the first quarter, followed by a sharp drop-off in the second and third quarters to 60 and 89 respectively. The final quarter of the year did see a resurgence to 166. SPAC IPOs raised total gross proceeds of $162 billion versus $83 billion in 2020. In terms of IPO volume, SPACs outpaced traditional IPOs for the second year running. However, by value SPAC IPOs accounted for a little less than half of total US IPO gross proceeds—48% in 2021 versus 46% in 2020—although this was a substantial uplift on the 9% average recorded over the prior decade. Twenty-three SPAC IPOs have already come to market so far this year.</p>
<p><strong>SPAC IPO pipeline remains robust…sort of</strong>:&nbsp;As of January 24, 2022, there were 244 pending SPAC IPOs. Eleven new S-1s have been filed so far this year. There was technically a twelfth S-1 filing—Murphy Canyon Acquisition Corp, a real estate focused SPAC, filed its S-1 on January 6, 2022 only to pull its IPO registration on January 26. In fact, this week has seen another three withdrawals of S-1 registrations that had been filed last year.</p>
<p><strong>De-SPACs in numbers</strong>:&nbsp;The sheer volume of SPAC IPOs that have come to the market over the past two years has ignited de-SPAC activity. A record 195 SPACs completed initial business combinations (IBCs) in 2021 versus 64 in 2020. Eight de-SPACs have been completed so far this year. As of current, 114 de-SPACs are pending, while 592 SPACs, or 84% of the 706 live SPACs, are still searching for merger targets versus 228 as of the end of 2020. With SPAC liquidations historically accounting for less than 2% of SPACs since 2010, the potential for even more significant de-SPAC activity in 2022 certainly exists.</p>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1013/image.png" width="482" height="263" class="editor-image img-responsive" data-image="1013"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1014/image.png" width="484" height="275" class="editor-image img-responsive" data-image="1014"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1015/image.png" width="482" height="283" class="editor-image img-responsive" data-image="1015"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1016/image.png" width="488" height="315" class="editor-image img-responsive" data-image="1016"></figure>
<div class="content-caption">Source: WTR Research</div>
<hr>
<h2>SPAC/DE-SPAC RETURNS</h2>
<h3>Pre-Merger Close SPACs</h3>
<p>The past two years have been profitable for SPAC sponsors in particular. After the IPO, pre-IPO SPAC sponsors can be holding equity worth 200-300% of their sponsor capital (typically 3-5% of IPO proceeds), depending on the structure of a SPAC and the size of its IPO. However, for investors entering into the SPAC fray at the IPO stage or later, profits have been harder to make, and the risks are much greater.</p>
<p>Our data show that SPACs still searching for targets typically trade close to their IPO prices, because if a SPAC fails to find an acquisition target within the predetermined period (typically two years, though there are cases where it is longer), the SPAC is dissolved and the capital is returned to investors, causing limited damage other than the opportunity cost of the investment.</p>
<p>SPACs that announce targets while in the process of de-SPACing also tend to trade around the IPO price. We discuss this in more detail in our SPAC Talk Focus section later in this report, which looks at the role of redemptions in SPAC investments.</p>
<p>Our data indicate that 90 out of the 114 pending de-SPACs are currently trading at an average of less than 2% below the SPAC IPO price, with only one trading at a loss of greater than 10% from its SPAC IPO price. There are 22 pending de-SPACs that are generating positive returns averaging ~32%, with five that are above their SPAC IPO price by more than 10%.</p>
<p>Table 1: Live IBCs – Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1017/image.png" width="593" height="173" class="editor-image img-responsive" data-image="1017"></figure>
<div class="content-caption">Source: WTR Research</div>
<p>By far and away the best performing SPAC in 2021is Digital World Acquisition Corp (DWAC), which was IPO-ed on September 3, 2021 and announced a merger agreement with Trump Media &amp; Technology Group on October 20, 2021. DWAC has since risen seven-fold in value from its IPO price.</p>
<p>Table 2: Live IBCs &gt;10% Positive Return</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1018/image.png" width="1028" height="116" class="editor-image img-responsive" data-image="1018"></figure>
<div class="content-caption">Source: WTR Research</div>
<p>Table 3: Live IBCs &gt;10% Negative Return</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1019/image.png" width="1033" height="106" class="editor-image img-responsive" data-image="1019"></figure>
<div class="content-caption">Source: WTR Research</div>
<hr>
<h2>De-SPACs</h2>
<p>De-SPACs have yielded profit opportunity to de-SPAC investors. Unfortunately, this has been the exception rather than the rule, even in the early days of the SPAC boom. Out of the 205 de-SPACs that were completed since the start of 2021, 184, or 90%, are currently trading below the $10 mark, with as many as 90 currently being valued at less than half their SPAC IPO values.</p>
<p>Table 4: De-SPACs – Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1020/image.png" width="512" height="162" class="editor-image img-responsive" data-image="1020"></figure>
<div class="content-caption">Source: WTR Research</div>
<p>The average return to de-SPAC investors across the 205 de-SPACs is running at close to a negative 45%, worse than the negative 39% for those who invested at the SPAC IPO stage. Only 13 of the 205 de-SPACs are generating positive returns since their de-SPACing, led by encryption software technology platform Arqit Quantum (NASDAQ: ARQQ), while electric vehicles maker Lucid Group (NASDAQ: LCID) is trading at more than 3.5X its merging SPAC’s IPO price. At the bottom of the rung of 2021 de-SPACs are auto insurer Metromile (NASDAQ: MILE) and metals miner, The Metals Company (NASDAQ: TMC). Both have given up 90% or more of their value since de-SPACing.</p>
<p>Table 5: Top 5 De-SPAC Performers</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1021/image.png" width="1007" height="156" class="editor-image img-responsive" data-image="1021"></figure>
<div class="content-caption">Source: WTR Research</div>
<p>Table 6: Bottom 5 De-SPAC Performers</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1022/image.png" width="1014" height="156" class="editor-image img-responsive" data-image="1022"></figure>
<div class="content-caption">Source: WTR Research</div>
<hr>
<h2>SPAC TALK FOCUS</h2>
<h2>The Redeeming Feature</h2>
<p>SPAC IPO investors can redeem their shares at any time before the de-SPAC process is completed. In other words, SPAC shareholders have the right to return a share of stock for the IPO price (usually $10), and, in effect, get their money back. One of the quirks of SPACs is that a SPAC IPO investor can vote in favor of an IBC, but still redeem shares before the de-SPAC is completed.</p>
<p>What typically happens is that those SPAC IPO investors who redeem shares tend to retain the warrants attached to the shares at the time of the IPO. This redemption process allows a SPAC investor to limit risk as well as take advantage of some arbitrage opportunities.</p>
<p>If too many shareholders redeem their shares, this can theoretically affect the ability of the SPAC to complete the merger transaction. A merger agreement (MA) between a SPAC and target company typically has a minimum cash contribution from investors to allow the merger to move to completion. However, these conditions are often waived. A recent example of this was when the SPAC Sustainable Opportunities Acquisition Corp (SOAC) entered into an agreement to acquire TMC for approximately $2.4 billion. The SPAC had raised $300 million through an IPO and had a PIPE commitment for an additional $330 million of funding to bring the total expected cash contribution of $630 million to the transaction, 2.5X the minimum cash contribution of $250 million set out in the MA. However, more than 90% of the SPAC’s IPO shareholders chose to redeem their shares which, together with a smaller than expected PIPE contribution, resulted in a cash contribution of only $137 million, a little over half the minimum cash contribution of $250 million prescribed by the MA. Nevertheless, TMC agreed to waive the minimum cash contribution to allow the merger to complete. This is perhaps one of a long list of things that will be looked at by the regulators. Sometimes, the SPAC’s sponsors take up the slack of redeemed shares, by picking up at least a portion of them. This was not the case with SOAC in the TMC transaction.</p>
<p>The story of 2021 seems to be the increased risk associated with de-SPACs. One measure of this is the rate of redemptions that have been reported ahead of the de-SPAC event. The average redemption rate rose from under 10% in 1Q21 to over 60% by 4Q21. The rising trend has continued into the first month of 2022, with an average rate to date of 75%, with some of the redemptions well in excess of 90%, including Gores Metropolous II/Sonder (SOND) coming out with an extremely high 96%, and Capstar Special Purpose Acquisition Co (CPRS)/ Gelesis (GLS) with 98.8%.</p>
<p>Figure 1: Average De-SPAC Redemption Rates</p>
<figure class="editor-figure mceNonEditable"><img src="https://d9v996t5t1ud1.cloudfront.net/production/uploads/redactor_assets/pictures/1023/image.png" width="575" height="348" class="editor-image img-responsive" data-image="1023"></figure>
<div class="content-caption">Source: Boardroom Alpha</div>
<div><hr>
<h3><span style="font-size: var(--content-font-size);">DISCLOSURES</span></h3>
</div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website <a href="https://www.smartkarma.com/www.watertowerresearch.com" target="_blank" rel="noopener">www.watertowerresearch.com</a>.</p>

KEY HIGHLIGHTS
SPACs in numbers:&nbsp;A record breaking 2021 ended with the completion of 613 SPAC IPOs, approaching 2.5X the number recorded in 2020, which itself had shattered previous records. Much of this was concentrated in the front-end of the year, with 298 SPAC IPOs, or 48% of the 2021 total, coming to market in the first quarter, followed by a sharp drop-off in the second and third quarters to 60 and 89 respectively. The final quarter of the year did see a resurgence to 166. SPAC IPOs raised total gross proceeds of $162 billion versus $83 billion in 2020. In terms of IPO volume, SPACs outpaced traditional IPOs for the second year running. However, by value SPAC IPOs accounted for a little less than half of total US IPO gross proceeds—48% in 2021 versus 46% in 2020—although this was a substantial uplift on the 9% average recorded over the prior decade. Twenty-three SPAC IPOs have already come to market so far this year.
SPAC IPO pipeline remains robust…sort of:&nbsp;As of January 24, 2022, there were 244 pending SPAC IPOs. Eleven new S-1s have been filed so far this year. There was technically a twelfth S-1 filing—Murphy Canyon Acquisition Corp, a real estate focused SPAC, filed its S-1 on January 6, 2022 only to pull its IPO registration on January 26. In fact, this week has seen another three withdrawals of S-1 registrations that had been filed last year.
De-SPACs in numbers:&nbsp;The sheer volume of SPAC IPOs that have come to the market over the past two years has ignited de-SPAC activity. A record 195 SPACs completed initial business combinations (IBCs) in 2021 versus 64 in 2020. Eight de-SPACs have been completed so far this year. As of current, 114 de-SPACs are pending, while 592 SPACs, or 84% of the 706 live SPACs, are still searching for merger targets versus 228 as of the end of 2020. With SPAC liquidations historically accounting for less than 2% of SPACs since 2010, the potential for even more significant de-SPAC activity in 2022 certainly exists.
SPAC STATISTICS




Source: WTR Research

SPAC/DE-SPAC RETURNS
Pre-Merger Close SPACs
The past two years have been profitable for SPAC sponsors in particular. After the IPO, pre-IPO SPAC sponsors can be holding equity worth 200-300% of their sponsor capital (typically 3-5% of IPO proceeds), depending on the structure of a SPAC and the size of its IPO. However, for investors entering into the SPAC fray at the IPO stage or later, profits have been harder to make, and the risks are much greater.
Our data show that SPACs still searching for targets typically trade close to their IPO prices, because if a SPAC fails to find an acquisition target within the predetermined period (typically two years, though there are cases where it is longer), the SPAC is dissolved and the capital is returned to investors, causing limited damage other than the opportunity cost of the investment.
SPACs that announce targets while in the process of de-SPACing also tend to trade around the IPO price. We discuss this in more detail in our SPAC Talk Focus section later in this report, which looks at the role of redemptions in SPAC investments.
Our data indicate that 90 out of the 114 pending de-SPACs are currently trading at an average of less than 2% below the SPAC IPO price, with only one trading at a loss of greater than 10% from its SPAC IPO price. There are 22 pending de-SPACs that are generating positive returns averaging ~32%, with five that are above their SPAC IPO price by more than 10%.
Table 1: Live IBCs – Key Stats

Source: WTR Research
By far and away the best performing SPAC in 2021is Digital World Acquisition Corp (DWAC), which was IPO-ed on September 3, 2021 and announced a merger agreement with Trump Media &amp; Technology Group on October 20, 2021. DWAC has since risen seven-fold in value from its IPO price.
Table 2: Live IBCs &gt;10% Positive Return

Source: WTR Research
Table 3: Live IBCs &gt;10% Negative Return

Source: WTR Research

De-SPACs
De-SPACs have yielded profit opportunity to de-SPAC investors. Unfortunately, this has been the exception rather than the rule, even in the early days of the SPAC boom. Out of the 205 de-SPACs that were completed since the start of 2021, 184, or 90%, are currently trading below the $10 mark, with as many as 90 currently being valued at less than half their SPAC IPO values.
Table 4: De-SPACs – Key Stats

Source: WTR Research
The average return to de-SPAC investors across the 205 de-SPACs is running at close to a negative 45%, worse than the negative 39% for those who invested at the SPAC IPO stage. Only 13 of the 205 de-SPACs are generating positive returns since their de-SPACing, led by encryption software technology platform Arqit Quantum (NASDAQ: ARQQ), while electric vehicles maker Lucid Group (NASDAQ: LCID) is trading at more than 3.5X its merging SPAC’s IPO price. At the bottom of the rung of 2021 de-SPACs are auto insurer Metromile (NASDAQ: MILE) and metals miner, The Metals Company (NASDAQ: TMC). Both have given up 90% or more of their value since de-SPACing.
Table 5: Top 5 De-SPAC Performers

Source: WTR Research
Table 6: Bottom 5 De-SPAC Performers

Source: WTR Research

SPAC TALK FOCUS
The Redeeming Feature
SPAC IPO investors can redeem their shares at any time before the de-SPAC process is completed. In other words, SPAC shareholders have the right to return a share of stock for the IPO price (usually $10), and, in effect, get their money back. One of the quirks of SPACs is that a SPAC IPO investor can vote in favor of an IBC, but still redeem shares before the de-SPAC is completed.
What typically happens is that those SPAC IPO investors who redeem shares tend to retain the warrants attached to the shares at the time of the IPO. This redemption process allows a SPAC investor to limit risk as well as take advantage of some arbitrage opportunities.
If too many shareholders redeem their shares, this can theoretically affect the ability of the SPAC to complete the merger transaction. A merger agreement (MA) between a SPAC and target company typically has a minimum cash contribution from investors to allow the merger to move to completion. However, these conditions are often waived. A recent example of this was when the SPAC Sustainable Opportunities Acquisition Corp (SOAC) entered into an agreement to acquire TMC for approximately $2.4 billion. The SPAC had raised $300 million through an IPO and had a PIPE commitment for an additional $330 million of funding to bring the total expected cash contribution of $630 million to the transaction, 2.5X the minimum cash contribution of $250 million set out in the MA. However, more than 90% of the SPAC’s IPO shareholders chose to redeem their shares which, together with a smaller than expected PIPE contribution, resulted in a cash contribution of only $137 million, a little over half the minimum cash contribution of $250 million prescribed by the MA. Nevertheless, TMC agreed to waive the minimum cash contribution to allow the merger to complete. This is perhaps one of a long list of things that will be looked at by the regulators. Sometimes, the SPAC’s sponsors take up the slack of redeemed shares, by picking up at least a portion of them. This was not the case with SOAC in the TMC transaction.
The story of 2021 seems to be the increased risk associated with de-SPACs. One measure of this is the rate of redemptions that have been reported ahead of the de-SPAC event. The average redemption rate rose from under 10% in 1Q21 to over 60% by 4Q21. The rising trend has continued into the first month of 2022, with an average rate to date of 75%, with some of the redemptions well in excess of 90%, including Gores Metropolous II/Sonder (SOND) coming out with an extremely high 96%, and Capstar Special Purpose Acquisition Co (CPRS)/ Gelesis (GLS) with 98.8%.
Figure 1: Average De-SPAC Redemption Rates

Source: Boardroom Alpha

DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: A Review of 2021 and the Beginning of 2022