Study: Long-term Optimistic Projections from SPACS Not Backed by Results

According to results of a new study from the University of Michigan Ross School of Business in Ann Arbor, when companies go public via a special purpose acquisition company (SPAC) instead of the tradition initial public offering (IPO) route, the optimistic, long-term projections often are not met.
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A new study from the University of Michigan Ross School of Business shows the optimistic long-term projections offered by SPACs when taking a company public are often not backed by results. // Stock Photo

According to results of a new study from the University of Michigan Ross School of Business in Ann Arbor, when companies go public via a special purpose acquisition company (SPAC) instead of the tradition initial public offering (IPO) route, the optimistic, long-term projections often are not met.

A SPAC is a firm that exists for the sole purpose of buying or merging with another company. SPAC managers raise funds by telling investors they will look for an acquisition target, but the target is unknown at the time the SPAC is formed. Once a target is identified, the SPAC provides information to convince investors that the acquisition makes sense. That’s when forecasts from the potential acquisition are provided.

“There’s been a lot of concern about SPACs because they issue these very long-term forecasts, very aggressive in many cases, and they haven’t been doing them long enough that you can really say if they are accurate or not,” says Greg Miller, co-author of the study and the Ernst and Young Professor of Accounting and chair of accounting at the U-M Ross School of Business.

“So the researchers looked at the actual results of SPAC projections, where available, but they also compared the SPAC forecasts to the actual performance of firms going through a roughly similar process, an IPO.”

Key findings of the study include:

  • 35 percent of the SPACs with observable revenue met or beat their projections.
  • For longer-term forecasts, the percentage of SPACs meeting projections was even lower.
  • Compared to companies that completed a traditional IPO, the SPAC projections are about three times larger on average than the actual revenue growth of the IPO firms.
  • After mergers via SPAC, firms tend to reduce their use of projections and move to projecting over shorter time periods.

Taken together, these results support concerns that SPAC mergers may rely on “highly optimistic” revenue projections, the researchers say.

Miller says there could be something unique about SPACs to justify the optimistic projections. Overall, however, he says the results suggest potential investors in SPAC mergers should be aware that many of the forecasts appear overly optimistic.

While he stops short of saying SPACs need to be regulated more closely, he believes that regulators should take note of the researchers’ work as they consider potential regulatory changes.

In fact, the U.S. Securities and Exchange Commission (SEC) recently proposed a set of new rules to protect investors in SPAC business combinations, and the Michigan Ross research is among those cited by the SEC.

“There’s certainly a debate about whether the brakes should be put on SPACs, and we don’t think you can conclude that from this research. We think we all need to do a lot more research,” says Miller. “This may be a way for a different type of company to go public, and if buyers are aware of that, that’s OK, they can make an informed decision and decide if they want to invest.”

The paper has been accepted for publication in Management Science. Miller worked with co-authors Elizabeth Blankespoor of the University of Washington, Bradley Hendricks of the University of North Carolina — both Michigan Ross Ph.D. graduates — and current Ross doctoral student DJ Stockbridge.

To access the study, click here.

To read DBusiness magazine’s 2022 Michigan Venture Capital Report, click here.

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