Research Raises Questions About Optimistic SPAC Financial Projections

A SPAC — special purpose acquisition company — is essentially a firm that exists only for the purpose of buying or merging with another company. The 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 their investors that the acquisition makes sense. That’s when forecasts from the potential acquisition are provided.

SPACs have been around for decades, but their use has grown dramatically in the last few years. Since SPACs are publicly traded firms that generally acquire private firms, they have become a popular way for firms to “go public” in place of the more traditional initial public offering process.

A new paper co-authored by Greg Miller, Ernst and Young Professor of Accounting and chair of accounting at the Ross School of Business, reviews the projections issued by SPACs from 2004-2021. Miller and his coauthors — Elizabeth Blankespoor of the University of Washington, Bradley E. Hendricks of the University of North Carolina - Chapel Hill (both Michigan Ross PhD graduates), and current Ross PhD student DJ Stockbridge — found reason to question such forecasts. 

“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,” Miller explained. 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 initial public offering.

The researchers found:

• Just 35% 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 wrote.

Miller noted that there could be something unique about SPACs to justify the optimistic projections. Overall, however, he said the results suggest that 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 recently proposed a set of new rules to protect investors in SPAC business combinations, and the Michigan Ross paper is among those cited by the SEC (page 194).

For potential investors, Miller’s advice is: “Make sure that you're really thinking about how to put these forecasts in context. If I were considering investing in a SPAC, I would be asking hard questions about what's happened in the past.

“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. 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. Our goal here was to get documented information out there on a large sample so that it can inform that regulatory debate.”

The paper has been accepted for publication in Management Science.