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)

<h3>KEY HIGHLIGHTS</h3>
<ul>
<li>Parting gift for SPAC investors.&nbsp;As expected, liquidations continue to pile up in December. Forty-three trust funds have been completed this month. These represent 43% of total liquidations (99) year-to-date, which have returned $37 billion to public SPAC shareholders. With seven liquidations scheduled for completion and another 13 accelerated liquidation vote dates set before the end of the month, 2022 will easily surpass 100 liquidations. We calculate that more than $40 billion will have been returned to public shareholders in 2022.</li>
<li>SPAC market correction accelerates.&nbsp;Another positive from the surge of liquidations is that it is helping to accelerate the re-balancing of the SPAC market. A combination of liquidations and choked off supply of new SPAC IPOs leaves 421 SPACs currently searching for IBCs. More liquidations before the year-end will drive that number (the lowest since February 2021) further down significantly in the coming weeks.</li>
<li>Sixth de-SPAC files for bankruptcy.&nbsp;On December 13, 10 months after going public via its merger with Chinese SPAC CITIC Capital Acquisition Corp. at an initial enterprise value of $1.1 billion, LiDAR maker Quanergy Systems (QNGY) filed for Chapter 11 on December 13. The LiDAR sector appears to be having its challenges. Two other LiDAR de-SPACs—Ouster (OUST) and Velodyne (VLDR)—are in the process of merging with each other on terms that would value the combination at a TEV of $106 million versus an initial combined TEV of ~$3.2 billion at the time of their de-SPACings.</li>
<li>SPACs and hype cycle.&nbsp;As we come to the end of 2022, we have seen how quickly the SPAC investment thesis has flipped from hype to disillusionment. This seems to be a classical application of Gartner’s hype cycle model, our topic in this week’s SPAC Talk Focus. While we think there will be more de-SPAC bankruptcies declared, we may be close to the trough of disillusionment stage of the cycle. This may be the point that value hunters may be readying themselves to seek out the hidden gems among the de-SPAC wreckage.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/225/original/image_59143430121671289351058.png?1671289352" class="editor-image img-responsive" data-smartkarma-image-id="316225"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/226/original/image_20757929131671289361672.png?1671289362" class="editor-image img-responsive" data-smartkarma-image-id="316226"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/227/original/image_72569872241671289371182.png?1671289371" class="editor-image img-responsive" data-smartkarma-image-id="316227"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN DECEMBER 2022</h2>
<p>Figure 1: IPO Pricings/Completed Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/228/original/image_70396354451671289398088.png?1671289399" class="editor-image img-responsive" data-smartkarma-image-id="316228"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 2: IBC Announcements/Terminations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/229/original/image_41716687761671289419339.png?1671289421" class="editor-image img-responsive" data-smartkarma-image-id="316229"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/230/original/image_723896871671289442127.png?1671289443" class="editor-image img-responsive" data-smartkarma-image-id="316230"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Figure 4: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/231/original/image_54526864081671289468591.png?1671289470" class="editor-image img-responsive" data-smartkarma-image-id="316231"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 5: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/232/original/image_46987985991671289493307.png?1671289495" class="editor-image img-responsive" data-smartkarma-image-id="316232"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 6: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/233/original/image_343981333101671289514714.png?1671289516" class="editor-image img-responsive" data-smartkarma-image-id="316233"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/234/original/image_521514548111671289534324.png?1671289536" class="editor-image img-responsive" data-smartkarma-image-id="316234"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 8: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/235/original/image_11887177121671289556645.png?1671289558" class="editor-image img-responsive" data-smartkarma-image-id="316235"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>BP has agreed to acquire de-SPAC Archaea Energy (LFG), a leading renewable natural gas producer for $4.1 billion or $26 per share in an all-cash transaction.</p>
<p>Figure 9: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/236/original/image_167205157131671289594202.png?1671289595" class="editor-image img-responsive" data-smartkarma-image-id="316236"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>SPACs and the Hype Cycle</h2>
<p>In the mid-1990s, management consulting firm Gartner developed a model to describe the adoption of new technologies, particularly the adoption life cycle of a new technology. Gartner called its model the hype cycle. Gartner developed the hype cycle model to provide one perspective of technology adoption and educate its clients about the promise of an emerging technology within the context of their industry and individual appetite for risk. Gartner’s model has since been applied to other types of innovations, including crypto and SPACs. That’s because the hype cycle is effectively a description of how we as humans respond to new things that we perceive promise to benefit us.</p>
<p>As the Figure 10 shows, Gartner’s model has five key phases of an innovation’s lifecycle.</p>
<p>Figure 10: Gartner’s Hype Cycle Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/237/original/image_232290450141671289622208.png?1671289623" class="editor-image img-responsive" data-smartkarma-image-id="316237"></figure>
<div class="content-remarks">
<p>Source: Gartner</p>
</div>
<p>It has been very apparent over the last two years that the SPAC model is vulnerable to the hype cycle, usually starting from the point at which the SPAC announces its IBC partner, which is the Innovation Trigger in Gartner speak. In this respect, SPACs tend to target privately held technologically innovative emerging growth companies that they can help by leveraging industry expertise supplied by SPAC sponsor knowledge as well as development capital represented by proceeds raised from the SPAC IPO.</p>
<p>Buying a SPAC before or around the time of an IBC announcement involves a dose (often a large one) of speculation, given the characteristics of the IBC partners being targeted. However, the SPAC redemption feature that can be exercised by public investors in the SPAC at any time before the de-SPACing process is completed allows for a margin of safety. The experience of the past two years has shown that those that invest in the deal for the investment idea, encouraged by inflated expectations of the what the IBC can deliver and ultimately fails to do, often driven by fanciful or unrealistic projections supplied by the transactional parties, can have the effect of exaggerating the hype cycle given the usually tight stock supply that is typically associated with SPACs and de-SPACs. The outcome is disillusionment, which has been all too common in SPAC land during course of the past 18 months.</p>
<p>There are numerous examples we can show, but here are four of them spanning the EV Automotive, AgriTech, Crypto, and PropTech sectors. Note the similarity in share price patterns compared with Gartner’s hype cycle.</p>
<p>Figure 11: From the Hype to the Disillusionment Phase</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/238/original/image_773670177151671289649462.png?1671289651" class="editor-image img-responsive" data-smartkarma-image-id="316238"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/316/239/original/image_369164304161671289665152.png?1671289667" class="editor-image img-responsive" data-smartkarma-image-id="316239"></figure>
<div class="content-remarks">
<p>Source: SPAC Research</p>
</div>
<p>With one-quarter of the companies de-SPACed since the start of 2021 currently trading below the $1 level, we are closer to the trough of disillusionment phase, if not yet at that inflection point. We are likely to see more de-SPAC bankruptcies in addition to the six that filed for bankruptcy this year, but at some point, the value hunters, whether they be strategic or financial buyers, will look through the de-SPAC wreckage for the hidden gems. Perhaps some of that $40 billion plus that public SPAC investors will have got back from the 100 plus liquidations that will have occurred in 2022 could find their way back into the more promising de-SPACs. It might be time to start doing some due diligence to discover who those hidden gems might be.</p>
<p>This will be the final SPAC Talk of 2022. We wish all our readers Happy Holidays!</p>
<h3>DISCLOSURES</h3>
<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 and Healthcare &amp; Healthcare Services sectors 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

Parting gift for SPAC investors.&nbsp;As expected, liquidations continue to pile up in December. Forty-three trust funds have been completed this month. These represent 43% of total liquidations (99) year-to-date, which have returned $37 billion to public SPAC shareholders. With seven liquidations scheduled for completion and another 13 accelerated liquidation vote dates set before the end of the month, 2022 will easily surpass 100 liquidations. We calculate that more than $40 billion will have been returned to public shareholders in 2022.
SPAC market correction accelerates.&nbsp;Another positive from the surge of liquidations is that it is helping to accelerate the re-balancing of the SPAC market. A combination of liquidations and choked off supply of new SPAC IPOs leaves 421 SPACs currently searching for IBCs. More liquidations before the year-end will drive that number (the lowest since February 2021) further down significantly in the coming weeks.
Sixth de-SPAC files for bankruptcy.&nbsp;On December 13, 10 months after going public via its merger with Chinese SPAC CITIC Capital Acquisition Corp. at an initial enterprise value of $1.1 billion, LiDAR maker Quanergy Systems (QNGY) filed for Chapter 11 on December 13. The LiDAR sector appears to be having its challenges. Two other LiDAR de-SPACs—Ouster (OUST) and Velodyne (VLDR)—are in the process of merging with each other on terms that would value the combination at a TEV of $106 million versus an initial combined TEV of ~$3.2 billion at the time of their de-SPACings.
SPACs and hype cycle.&nbsp;As we come to the end of 2022, we have seen how quickly the SPAC investment thesis has flipped from hype to disillusionment. This seems to be a classical application of Gartner’s hype cycle model, our topic in this week’s SPAC Talk Focus. While we think there will be more de-SPAC bankruptcies declared, we may be close to the trough of disillusionment stage of the cycle. This may be the point that value hunters may be readying themselves to seek out the hidden gems among the de-SPAC wreckage.

SPAC STATISTICS




Source: WTR

SPAC HAPPENINGS IN DECEMBER 2022
Figure 1: IPO Pricings/Completed Liquidations


Source: WTR Research

Figure 2: IBC Announcements/Terminations


Source: WTR Research

Figure 3: De-SPACings


Source: WTR Research

SPAC/DE-SPAC RETURNS
Figure 4: Live IBCs (Initial Business Combinations)—Key Stats


Source: WTR Research

Figure 5: Top 5 Live IBCs by Share Price


Source: WTR Research

Figure 6: Bottom 5 Live IBCs by Share Price


Source: WTR Research

Figure 7: De-SPACs—Key Stats


Source: WTR Research

Figure 8: Top 5 De-SPAC Performers by Share Price


Source: WTR Research

BP has agreed to acquire de-SPAC Archaea Energy (LFG), a leading renewable natural gas producer for $4.1 billion or $26 per share in an all-cash transaction.
Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
SPACs and the Hype Cycle
In the mid-1990s, management consulting firm Gartner developed a model to describe the adoption of new technologies, particularly the adoption life cycle of a new technology. Gartner called its model the hype cycle. Gartner developed the hype cycle model to provide one perspective of technology adoption and educate its clients about the promise of an emerging technology within the context of their industry and individual appetite for risk. Gartner’s model has since been applied to other types of innovations, including crypto and SPACs. That’s because the hype cycle is effectively a description of how we as humans respond to new things that we perceive promise to benefit us.
As the Figure 10 shows, Gartner’s model has five key phases of an innovation’s lifecycle.
Figure 10: Gartner’s Hype Cycle Model


Source: Gartner

It has been very apparent over the last two years that the SPAC model is vulnerable to the hype cycle, usually starting from the point at which the SPAC announces its IBC partner, which is the Innovation Trigger in Gartner speak. In this respect, SPACs tend to target privately held technologically innovative emerging growth companies that they can help by leveraging industry expertise supplied by SPAC sponsor knowledge as well as development capital represented by proceeds raised from the SPAC IPO.
Buying a SPAC before or around the time of an IBC announcement involves a dose (often a large one) of speculation, given the characteristics of the IBC partners being targeted. However, the SPAC redemption feature that can be exercised by public investors in the SPAC at any time before the de-SPACing process is completed allows for a margin of safety. The experience of the past two years has shown that those that invest in the deal for the investment idea, encouraged by inflated expectations of the what the IBC can deliver and ultimately fails to do, often driven by fanciful or unrealistic projections supplied by the transactional parties, can have the effect of exaggerating the hype cycle given the usually tight stock supply that is typically associated with SPACs and de-SPACs. The outcome is disillusionment, which has been all too common in SPAC land during course of the past 18 months.
There are numerous examples we can show, but here are four of them spanning the EV Automotive, AgriTech, Crypto, and PropTech sectors. Note the similarity in share price patterns compared with Gartner’s hype cycle.
Figure 11: From the Hype to the Disillusionment Phase



Source: SPAC Research

With one-quarter of the companies de-SPACed since the start of 2021 currently trading below the $1 level, we are closer to the trough of disillusionment phase, if not yet at that inflection point. We are likely to see more de-SPAC bankruptcies in addition to the six that filed for bankruptcy this year, but at some point, the value hunters, whether they be strategic or financial buyers, will look through the de-SPAC wreckage for the hidden gems. Perhaps some of that $40 billion plus that public SPAC investors will have got back from the 100 plus liquidations that will have occurred in 2022 could find their way back into the more promising de-SPACs. It might be time to start doing some due diligence to discover who those hidden gems might be.
This will be the final SPAC Talk of 2022. We wish all our readers Happy Holidays!
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 and Healthcare &amp; Healthcare Services sectors 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: SPACs and the Hype Cycle