SPACs will drive $300 billion in M&A activity over the next 2 years after a monstrous 2020, Goldman says

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  • Blank-check companies looking for their next target could drive $300 billion in mergers and acquisitions over the next two years, according to Goldman Sachs.
  • A hunt for yield, the shift in focus from value to growth stocks, and retail investors looking for early-stage businesses has driven investor interest in SPACs in 2020, strategists said.
  • “If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion,” they noted.
  • The strategists warned that weak returns represent one headwind to future SPAC issuance.
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Blank-check companies looking to merge with or acquire another company could drive $300 billion in M&A activity over the next two years, Goldman Sachs said on Monday.

About 205 special purpose acquisition companies have raised a record $70 billion in IPO proceeds year-to-date, representing a five-fold increase from 2019, strategists led by David Kostin wrote. SPAC IPOs this year account for 52% of the $124 billion raised via 356 US IPOs.

Three major factors drove investor interest in 2020, or what they called “the year of the SPAC.” These include a shift in focus from value stocks to growth stocks, retail investors keen on non-traditional and early-stage businesses, and a hunt for cash substitutes when key policy rates are near zero.

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Goldman estimates that 205 SPACs will need to acquire a target in 2021 or 2022, based on their 24-month post-IPO expiration dates. 

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“If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion,” the strategists said.

SPACs serve as a cheaper and faster alternative to the traditional IPO route as they are created solely to merge with or acquire other businesses, and take the merged entity public. Even after a SPAC goes public, it could take up to two years to find a desirable M&A target. If it doesn’t, the SPAC is liquidated, and funds raised are meant to be returned to investors.

2020 has seen prominent entrepreneurs, hedge-fund managers, and popular celebrities like Bill Ackman, Richard Branson, Michael Jordan, and Shaquille O’Neal become involved in SPACs, and the blank-check firms were led to market by investment banks like Morgan Stanley, Credit Suisse, and Goldman Sachs.

“We expect a high level of SPAC activity will continue into 2021,” Goldman Sachs said, and warned that weak post-acquisition returns represent a headwind to future SPAC issuance.

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