In a typical M&A deal, one might assume the shareholder vote to approve a transaction is the gate that will decide whether the deal gets consummated. If shareholders approve the deal, the acquirer will proceed to meet other closing conditions and ultimately deliver merger consideration to the sellers.
But in a SPAC deal, the approval vote is largely a formality. Most shareholders are also warrant-holders and are incentivized to vote in favor of a deal even if they plan to redeem for cash. This means that meeting the target’s minimum cash condition is usually the primary deal hurdle for SPACs.
Most deals contain an available cash condition that represents a minimum amount of proceeds below which the target will not be obligated to consummate the transaction. The cash condition hopefully represents a number the sponsor group believes it can reasonably achieve given their banking syndicate, network, access to capital, and the target company itself.
Since cash in trust is subject to redemption, the easiest way to make progress on the cash condition up front is to secure commitments for a PIPE investment. We’ve done plenty of work on PIPE financing in the past, and we’ve seen a strong correlation between deal performance and the amount of PIPE financing.
But there’s also a lot we can learn from SPAC deals’ minimum cash conditions. We took all the closed SPAC deals since 2019 and lined them up below with the minimum cash condition on the x-axis and the deal’s current market price on the y-axis. We used a log scale for a better visualization.
There’s a significant positive correlation between a deal’s minimum cash condition and where it’s currently trading. This may simply confirm many readers’ natural intuition — larger businesses tend to perform better as SPAC deals and also have greater capital requirements. (We’ve explored the relationship between enterprise value and deal success in the past.)
There’s also a cluster of deals in the lower left corner that are worth mentioning. If a deal didn’t have a minimum cash requirement, we used the $5mm net tangible assets threshold instead. Do you notice anything those SPACs all have in common? Not one of them is trading above its cash in trust value from closing. If you’re looking for a single factor to predict the ultimate success of a deal, you could do a lot worse than the deal’s minimum cash condition.
You could also use the ratio of the deal’s minimum cash condition to the size of the SPAC’s initial trust account, as shown below.
The read on the above chart is pretty straightforward. If a SPAC and its acquisition target aren’t trying to hang onto at least half of the trust account, the outcomes have been disappointing. We frequently tell first-time SPAC sponsors the most important thing they can do to support a deal is to line up committed equity financing (via PIPE, FPA or some kind of backstop arrangement) at the time their transaction is announced. So we wanted to take this analysis a step further and look at what fraction of each deal’s minimum cash condition was satisfied with committed financing at deal announcement.
The majority of SPAC deals from the past 10 years traded below cash in trust between announcement and deal closing. Shareholders were largely yield-focused and a high redemption count was likely. That meant that a deal without much in committed capital might struggle to get over the finish line, potentially leading to the target relaxing the deal’s minimum cash condition or to last-minute creative financing arrangements.
These days, SPACs are getting the benefit of the doubt and more than half of pending deals are trading above cash in trust per share. And 44 of this year’s 59 deal announcements contained some form of PIPE or alternative equity financing.
It’s striking to see how much more frequently SPAC deals are covering most of (or greater than!) their minimum cash condition at deal announcement. One cause is that it must be easier to sell a $10 PIPE investment if your common stock is already trading at $11 before announcement. And when we see a transaction announced with a $200mm minimum cash condition and a $300mm PIPE commitment, we can infer with high likelihood that the PIPE was upsized and/or oversubscribed after the initial deal terms were agreed upon.
That scenario is likely fairly bullish for a SPAC deal. After all, if PIPE investors are competing to put more money into a deal, other institutional investors and retail may follow. The chart below demonstrates a strong correlation between meeting your minimum cash condition at announcement and trading performance.
A handful of deals have traded well without any PIPE or FPA. But for the most part, SPACs forced to rely solely on their trust accounts have struggled. Of the 20 deals in this data set with no committed capital at transaction announcement, only three are currently trading above $10 per share.
There’s been a flywheel effect in SPACs over the past couple years. Exciting business combinations delivered great returns to front-end investors and attracted higher quality sponsors, who then can bring more exciting companies to the table.
Hopefully that trend continues to produce deals the market is enthused about. If you’re trying to keep a pulse on the market (beyond individual deal fundamentals), make sure to watch those cash conditions and how they’re being financed.