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>KEY HIGHLIGHTS</h2>
<ul>
<li>Backlog of SPAC IPOs continues to contract.&nbsp;So far in March, filing withdrawals have outpaced new filings by a ratio of 2.75:1. The number of pending SPAC IPOs (193) is the lowest since February 2021 when SPAC euphoria was at or near its peak. But 608 SPACs are still searching for targets (vs. ~350 in February 2021), and it is taking twice as long for SPACs to find targets than it did a year ago. The competition among SPACs to find deals remains very intense, so we would expect the backlog of SPAC IPOs to continue to contract. Surprisingly, there has been only one SPAC liquidation recorded YTD, with a much bigger number gaining approvals for timeline extensions.</li>
<li>Increased deal activity.&nbsp;After a slow start to the month, there was a marked increase in deal activity in the past week. Between March 17 and 23, eight new deals were announced, with only one deal cancellation. It’s been a while since we have seen as many new deals announced within one week, so that is encouraging. Moreover, five of those deals are of reasonable size, with transaction values more than $1 billion. Activity has also returned on the de-SPACing front with three de-SPACs completed in the past week and all with transaction values of more than $1 billion: PGRU ($1.35 billion), FRGE ($1.61 billion), and ALLG ($2.65 billion).</li>
<li>The low float squeeze phenomenon.&nbsp;The surge in redemptions by SPAC IPO shareholders has created an interesting phenomenon. Half the companies that have de-SPACed YTD have experienced significant squeeze rallies within a short period even though the majority had not gained much traction when the deals were initially announced. Comparisons are made with the meme stock trade, a classic short squeeze which only happens when the stock has high short interest. But a de-SPAC squeeze often occurs without a high short interest. The low float squeeze phenomenon is the subject of this week's SPAC Talk Focus.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/119/original/image_97345100961648168617770.png?1648168619" class="editor-image img-responsive" data-smartkarma-image-id="265119"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/120/original/image_67496043071648168638015.png?1648168639" class="editor-image img-responsive" data-smartkarma-image-id="265120"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/121/original/image_51192341381648168652176.png?1648168652" class="editor-image img-responsive" data-smartkarma-image-id="265121"></figure>
<p>Source: WTR Research</p>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Table 1: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/122/original/image_41103092191648168689760.png?1648168691" class="editor-image img-responsive" data-smartkarma-image-id="265122"></figure>
<p>Source: WTR Research</p>
<p>Table 2: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/123/original/image_988019357101648168713749.png?1648168716" class="editor-image img-responsive" data-smartkarma-image-id="265123"></figure>
<p>Source: WTR Research</p>
<p>Table 3: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/124/original/image_313362690111648168743367.png?1648168745" class="editor-image img-responsive" data-smartkarma-image-id="265124"></figure>
<p>Source: WTR Research</p>
<p>Table 4: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/126/original/image_53523138121648168825869.png?1648168828" class="editor-image img-responsive" data-smartkarma-image-id="265126"></figure>
<p>Source: WTR Research</p>
<p>Table 5: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/127/original/image_9469792131648168857584.png?1648168860" class="editor-image img-responsive" data-smartkarma-image-id="265127"></figure>
<p>Source: WTR Research</p>
<p>Table 6: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/128/original/image_600159595141648168884886.png?1648168887" class="editor-image img-responsive" data-smartkarma-image-id="265128"></figure>
<p>Source: WTR Research</p>
<h2>SPAC TALK FOCUS</h2>
<h2>SPACs and the Low Public Float Phenomenon</h2>
<p>Last week, we looked at the ramifications of the high SPAC shareholder stock redemption rates from a de-SPAC financing perspective, but there is another consequence of high SPAC stock redemptions that has been a topic of conversation over the past six months or so. This phenomenon is known as the low float squeeze. Over this period, we have seen some evidence of this occurrence, with the majority of the SPACs not having gained much pre-merger traction in the wake of deal announcement several months prior. Simply put, the very high redemption rates that have occurred in the past several months have significantly reduced the public float of those de-SPACs that have come to market (floats which in many instances were not that large on a no-redemption basis to begin with) creating illiquidity in the shares and a high level of volatility in the early trading lifecycle of those de-SPACs.</p>
<p>In addition to high redemption rates, the low public float will typically be compounded by SPAC founder shares, PIPE investors, and existing target company shareholders usually being locked up from trading for a certain period following the de-SPACing. Mostly, volatility has been on the upside initially and is generally a replication of what has been happening with the so-called meme stocks. In the case of de-SPACs, it may be a combination of buyers chasing very limited float and short sellers (typically hedge funds) looking to cover their positions as the stock rises. Unlike meme stocks, de-SPAC squeezes are not dependent on having a high short interest. In fact, in most of the de-SPAC squeezes, short interest has been fairly negligible.</p>
<p>SPACs with high option activity and those trading below their IPO values around the time of their merger votes tend to be harbingers for a post de-SPAC low float squeeze. The squeeze rallies can be fast and furious and can also be rapidly reversed. For fundamentally driven de-SPAC investors, it may pay to wait until the dust settles. The table below highlights that half of the 26 de-SPACs completed so far this year have experienced squeeze rallies of 55% and much more within a matter of weeks. At the top of the list, ISPO and CPTN, both de-SPACed last month, saw their values increase more than tenfold within just five trading days only to lose all those gains before the end of March.</p>
<hr>
<p>Table 7: Beware of the Low Float Squeeze</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/129/original/image_629244116151648168928844.png?1648168931" class="editor-image img-responsive" data-smartkarma-image-id="265129"></figure>
<p>Source: WTR Research, Yahoo Finance</p>
<h2>DISCLOSURES</h2>
<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 www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

Backlog of SPAC IPOs continues to contract.&nbsp;So far in March, filing withdrawals have outpaced new filings by a ratio of 2.75:1. The number of pending SPAC IPOs (193) is the lowest since February 2021 when SPAC euphoria was at or near its peak. But 608 SPACs are still searching for targets (vs. ~350 in February 2021), and it is taking twice as long for SPACs to find targets than it did a year ago. The competition among SPACs to find deals remains very intense, so we would expect the backlog of SPAC IPOs to continue to contract. Surprisingly, there has been only one SPAC liquidation recorded YTD, with a much bigger number gaining approvals for timeline extensions.
Increased deal activity.&nbsp;After a slow start to the month, there was a marked increase in deal activity in the past week. Between March 17 and 23, eight new deals were announced, with only one deal cancellation. It’s been a while since we have seen as many new deals announced within one week, so that is encouraging. Moreover, five of those deals are of reasonable size, with transaction values more than $1 billion. Activity has also returned on the de-SPACing front with three de-SPACs completed in the past week and all with transaction values of more than $1 billion: PGRU ($1.35 billion), FRGE ($1.61 billion), and ALLG ($2.65 billion).
The low float squeeze phenomenon.&nbsp;The surge in redemptions by SPAC IPO shareholders has created an interesting phenomenon. Half the companies that have de-SPACed YTD have experienced significant squeeze rallies within a short period even though the majority had not gained much traction when the deals were initially announced. Comparisons are made with the meme stock trade, a classic short squeeze which only happens when the stock has high short interest. But a de-SPAC squeeze often occurs without a high short interest. The low float squeeze phenomenon is the subject of this week's SPAC Talk Focus.

SPAC STATISTICS



Source: WTR Research
SPAC/DE-SPAC RETURNS
Table 1: Live IBCs (Initial Business Combinations)—Key Stats

Source: WTR Research
Table 2: Top 5 Live IBCs by Share Price

Source: WTR Research
Table 3: Bottom 5 Live IBCs by Share Price

Source: WTR Research
Table 4: De-SPACs—Key Stats

Source: WTR Research
Table 5: Top 5 De-SPAC Performers by Share Price

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

Source: WTR Research
SPAC TALK FOCUS
SPACs and the Low Public Float Phenomenon
Last week, we looked at the ramifications of the high SPAC shareholder stock redemption rates from a de-SPAC financing perspective, but there is another consequence of high SPAC stock redemptions that has been a topic of conversation over the past six months or so. This phenomenon is known as the low float squeeze. Over this period, we have seen some evidence of this occurrence, with the majority of the SPACs not having gained much pre-merger traction in the wake of deal announcement several months prior. Simply put, the very high redemption rates that have occurred in the past several months have significantly reduced the public float of those de-SPACs that have come to market (floats which in many instances were not that large on a no-redemption basis to begin with) creating illiquidity in the shares and a high level of volatility in the early trading lifecycle of those de-SPACs.
In addition to high redemption rates, the low public float will typically be compounded by SPAC founder shares, PIPE investors, and existing target company shareholders usually being locked up from trading for a certain period following the de-SPACing. Mostly, volatility has been on the upside initially and is generally a replication of what has been happening with the so-called meme stocks. In the case of de-SPACs, it may be a combination of buyers chasing very limited float and short sellers (typically hedge funds) looking to cover their positions as the stock rises. Unlike meme stocks, de-SPAC squeezes are not dependent on having a high short interest. In fact, in most of the de-SPAC squeezes, short interest has been fairly negligible.
SPACs with high option activity and those trading below their IPO values around the time of their merger votes tend to be harbingers for a post de-SPAC low float squeeze. The squeeze rallies can be fast and furious and can also be rapidly reversed. For fundamentally driven de-SPAC investors, it may pay to wait until the dust settles. The table below highlights that half of the 26 de-SPACs completed so far this year have experienced squeeze rallies of 55% and much more within a matter of weeks. At the top of the list, ISPO and CPTN, both de-SPACed last month, saw their values increase more than tenfold within just five trading days only to lose all those gains before the end of March.

Table 7: Beware of the Low Float Squeeze

Source: WTR Research, Yahoo Finance
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: Feeling The Squeeze