SPACs Aren’t a Guarantee: CF Finance III and AEye are Proof

Programming note: Money Stuff will be off tomorrow, back on Wednesday.

SPAC-down

One big advantage of going public by merging with a special purpose acquisition company, instead of through a traditional initial public offering, is that the SPAC tends to offer more certainty of price and size. With an IPO, you announce “we’d like to raise $400 million at a valuation of $1.8 billion to $2.2 billion,” or whatever, and then you go out and market the deal to investors. Perhaps they love it and you upsize and reprice the deal, raising $500 million at a $2.5 billion valuation. Perhaps they hate it and you downsize and reprice to raise $300 million at a $1.5 billion valuation. Perhaps they super hate it and you end up pulling the deal, raising no money at any valuation. Most IPOs mostly go fine, but some go poorly, and if yours goes poorly that’s a serious black eye.

With a SPAC, you negotiate the price first. You meet with SPACs, and you discuss valuation, and you agree to a deal at a specific valuation. Alongside that deal, you negotiate a PIPE, a private investment in public equity, with several big institutional investors. Then when the price and size are locked up, you announce the deal. “We’re going to raise $455 million at a $1.9 billion valuation,” you say, and you have the signed merger agreement to prove it. By the time you go public with the deal, the deal is done; the risk of failure and embarrassment is minimized.

I mean, roughly. Actually there are contingencies to the SPAC too. In particular, the shareholders of the SPAC — the investors who have put money into the SPAC’s pot of money, hoping that it will find and negotiate a good acquisition — get to evaluate the deal after you announce it. If they don’t like it, they can vote against it. Or they can pull their money out of the SPAC: They invested $10 per share in the SPAC, and it was put into a trust; if they don’t like the deal that the SPAC does, they can get their money back from the trust with interest. If your deal was for $455 million, with $230 million from the SPAC’s trust and $225 million from the PIPE, that $230 million is fully at risk: You might end up with $225 million, or $455 million, or anything in between. Or the SPAC shareholders might vote no and the whole deal will be off. 

So there is still marketing to be done — to the SPAC’s shareholders — after the deal is announced. And this marketing takes a bit of time; you have to do a proxy statement and get a shareholder vote and get regulatory approvals and so forth. And if anything goes wrong in that time — if there’s bad news about the company, or if the market goes down — then you are at risk for the same sort of embarrassing black eye as you’d get from a failed IPO.

As with IPOs, this is not much of a problem for hot deals in booming markets: You announce the deal, the SPAC’s shares — which represent $10 in cash — trade up from, say, $12 (where they were trading based on the mere hope of a hot deal) to, say, $20 (reflecting a view that the SPAC is dramatically underpaying for the company it is taking public), everybody votes in favor of the deal, nobody redeems, everything goes great and I write a smug post about how you “left money on the table” by selling $20 worth of stock for $10. 

But as with IPOs, as the market cools, sometimes deals struggle. Here’s one:

CF Finance Acquisition Corp. III (Nasdaq: CFAC) (“CF III”), a special purpose acquisition company sponsored by Cantor Fitzgerald, and AEye, Inc. (“AEye”), the global leader in active, next generation LiDAR solutions, today announced that due to recent valuation changes of publicly traded lidar companies and changing conditions in the automotive lidar industry, they have amended their…