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>
<div></div>
<ul style="list-style-type: none;">
<li>A flurry of new deal announcements, cancellations.&nbsp;While the SPAC IPO market is dead for all intents and purposes, we’ve only had three pricings in the last two months and none for over a month. However, there has been much more activity on the deal front, with six new deal announcements made in the past seven days. This brings the month’s total to 11, with an aggregate transaction value of $8 billion (versus $6.7 billion in June) and the average deal size at $727 million, the highest since March 2022. On the flipside, there have also been seven deal cancellations worth a combined $12 billion. For only the second month this year, the value of IBC cancellations has outsized the value of new deals announced.</li>
<li>Redemptions at record highs.&nbsp;We are continuing to see a steady stream of de-SPACings. Eight mergers were completed in July, which is within the range of what we have seen for much of 2022. The total number of de-SPACings in the first seven months is 56. The average monthly redemption rate is at a record high of 92%, leaving all but crumbs in the IBC’s trust funds.</li>
<li>Redemptions and the first-day pricing phenomenon.&nbsp;High redemptions that are occurring are significantly reducing the public float in de-SPACs. Since the SEC appears to liken de-SPACings to traditional IPOs in its proposed new rules governing SPACs, our SPAC Talk Focus investigates whether de-SPACs share the traditional IPO first-day pricing phenomenon.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/288/985/original/image_78636963031659178601362.png?1659178604" class="editor-image img-responsive" data-smartkarma-image-id="288985"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h3>SPAC HAPPENINGS IN JULY 2022</h3>
<p>Figure 1: IPO Pricings/Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/288/986/original/image_20316891241659178641727.png?1659178643" class="editor-image img-responsive" data-smartkarma-image-id="288986"></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/000/288/987/original/image_18584189651659178663540.png?1659178666" class="editor-image img-responsive" data-smartkarma-image-id="288987"></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/000/288/988/original/image_21239890861659178686815.png?1659178688" class="editor-image img-responsive" data-smartkarma-image-id="288988"></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/000/288/989/original/image_26474491971659178714069.png?1659178716" class="editor-image img-responsive" data-smartkarma-image-id="288989"></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/000/288/990/original/image_63055584881659178736761.png?1659178738" class="editor-image img-responsive" data-smartkarma-image-id="288990"></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/000/288/991/original/image_38482826991659178758860.png?1659178760" class="editor-image img-responsive" data-smartkarma-image-id="288991"></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/000/288/992/original/image_35147046101659178779052.png?1659178780" class="editor-image img-responsive" data-smartkarma-image-id="288992"></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/000/288/993/original/image_12015034111659178803551.png?1659178805" class="editor-image img-responsive" data-smartkarma-image-id="288993"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<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/000/288/994/original/image_422846723121659178824871.png?1659178826" class="editor-image img-responsive" data-smartkarma-image-id="288994"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>Redemptions, Floats, and First-Day Pricing</h2>
<p>A well-known and documented phenomenon is the first day return typically generated by IPOs. This is also known as the initial underpricing practice of investment bankers. There have been several studies that have validated this premise. The only time the average has been negative was in 2008 when the Great Financial Crisis unfolded.</p>
<p>Figure 10: Average First Day Gains in US IPOs 2008-2021</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/288/995/original/image_783743340131659178850732.png?1659178852" class="editor-image img-responsive" data-smartkarma-image-id="288995"></figure>
<div class="content-remarks">
<p>Source: Statista</p>
</div>
<p>Since the SEC likes to compare de-SPACings with traditional IPOs (and is looking to adjust the rules accordingly for which we are still waiting with bated breath), we have decided to investigate whether the de-SPACs do indeed share this IPO pricing phenomenon. Of course, there are significant differences between de-SPACs and IPOs. For one thing, de-SPAC prices are not set by investment banks but are left to market forces. However, there is a critical factor to consider, and that is the unique ability of SPAC investors to redeem their shares before de-SPACing occurs even when they vote in favor of the IBC.</p>
<p>As the front-page chart shows, redemptions rates have shot up over the past year and are now barely leaving crumbs from SPAC trust funds to hand over to de-SPACs following consummation of the IBC. The very high redemption rates that have occurred in the past several months have significantly reduced the public float in 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. On March 24, 2022, in our SPAC Talk edition titled,&nbsp;‘Feeling the Squeeze’,&nbsp;we documented strong evidence of de-SPACs with low floats exacerbated by high redemptions experiencing post-redemptions share price squeezes in the early days or weeks of their life cycle. However, considering all the de-SPACings that have occurred in 2022 to date, our assessment (Figure 11) evidence of an IPO-like first-day pricing phenomenon is mixed, with four out of the seven months of 2022 to date averaging positive first-day returns. Interestingly, positive last-day returns by pre-merger SPACs are achieved on a more consistent basis, with six out of the seven months achieving positive returns.</p>
<p>Figure 11: Last-Day Pre-Merger SPAC Return/First-Day De-SPAC Return</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/288/996/original/image_894172221141659178876509.png?1659178877" class="editor-image img-responsive" data-smartkarma-image-id="288996"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>DISCLOSURES</h2>
<div></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 www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


A flurry of new deal announcements, cancellations.&nbsp;While the SPAC IPO market is dead for all intents and purposes, we’ve only had three pricings in the last two months and none for over a month. However, there has been much more activity on the deal front, with six new deal announcements made in the past seven days. This brings the month’s total to 11, with an aggregate transaction value of $8 billion (versus $6.7 billion in June) and the average deal size at $727 million, the highest since March 2022. On the flipside, there have also been seven deal cancellations worth a combined $12 billion. For only the second month this year, the value of IBC cancellations has outsized the value of new deals announced.
Redemptions at record highs.&nbsp;We are continuing to see a steady stream of de-SPACings. Eight mergers were completed in July, which is within the range of what we have seen for much of 2022. The total number of de-SPACings in the first seven months is 56. The average monthly redemption rate is at a record high of 92%, leaving all but crumbs in the IBC’s trust funds.
Redemptions and the first-day pricing phenomenon.&nbsp;High redemptions that are occurring are significantly reducing the public float in de-SPACs. Since the SEC appears to liken de-SPACings to traditional IPOs in its proposed new rules governing SPACs, our SPAC Talk Focus investigates whether de-SPACs share the traditional IPO first-day pricing phenomenon.

SPAC STATISTICS


Source: WTR Research

SPAC HAPPENINGS IN JULY 2022
Figure 1: IPO Pricings/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

Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
Redemptions, Floats, and First-Day Pricing
A well-known and documented phenomenon is the first day return typically generated by IPOs. This is also known as the initial underpricing practice of investment bankers. There have been several studies that have validated this premise. The only time the average has been negative was in 2008 when the Great Financial Crisis unfolded.
Figure 10: Average First Day Gains in US IPOs 2008-2021


Source: Statista

Since the SEC likes to compare de-SPACings with traditional IPOs (and is looking to adjust the rules accordingly for which we are still waiting with bated breath), we have decided to investigate whether the de-SPACs do indeed share this IPO pricing phenomenon. Of course, there are significant differences between de-SPACs and IPOs. For one thing, de-SPAC prices are not set by investment banks but are left to market forces. However, there is a critical factor to consider, and that is the unique ability of SPAC investors to redeem their shares before de-SPACing occurs even when they vote in favor of the IBC.
As the front-page chart shows, redemptions rates have shot up over the past year and are now barely leaving crumbs from SPAC trust funds to hand over to de-SPACs following consummation of the IBC. The very high redemption rates that have occurred in the past several months have significantly reduced the public float in 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. On March 24, 2022, in our SPAC Talk edition titled,&nbsp;‘Feeling the Squeeze’,&nbsp;we documented strong evidence of de-SPACs with low floats exacerbated by high redemptions experiencing post-redemptions share price squeezes in the early days or weeks of their life cycle. However, considering all the de-SPACings that have occurred in 2022 to date, our assessment (Figure 11) evidence of an IPO-like first-day pricing phenomenon is mixed, with four out of the seven months of 2022 to date averaging positive first-day returns. Interestingly, positive last-day returns by pre-merger SPACs are achieved on a more consistent basis, with six out of the seven months achieving positive returns.
Figure 11: Last-Day Pre-Merger SPAC Return/First-Day De-SPAC Return


Source: WTR

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: De-SPACs and the IPO Pricing Phenomenon