The list of companies going public through a blank-check merger and then going bankrupt shortly after has a major new member: WeWork.
After just over two years as a public company, the notorious office-sharing company has filed for Chapter 11 protection. WeWork joins the likes of Core Scientific Inc., one of the largest bitcoin mining companies, and Richard Branson’s Virgin Orbit Holdings Inc., in filing for bankruptcy and being wiped out. Billions in market value.
WeWork is the highest-profile SPAC bomber. The company’s $9 billion valuation in the October 2021 deal — one of the largest mergers by enterprise value at the time — was an example of the extravagance of a near-zero interest rate environment.
“There was a big change in 2021, as quite a few venture capital-backed companies merged with SPACs and the track record wasn’t good,” says Jay Ritter, a finance professor at the University of Florida. “Critics of SPACs have said for many years that a lot of the companies that were merging with SPACs were low-quality companies and the evidence seems to be somewhat consistent with that.”
There are at least 23 bankrupt companies that originated from special purpose acquisition companies, or SPACs, and more than a dozen additional companies that were acquired for far less than their initial value. Furthermore, there are approximately 110 post-SPAC companies trading for less than $1. They are all a reminder of the collapse of the pandemic-fueled frenzy surrounding the strategy.
SPACs are also called blank checks because they raise money through initial public offerings with plans to merge with an unspecified target company. They give themselves a chance to buy something or return cash to investors, and holders can get their investment back if they don’t like the deal.
The pandemic and low-rate environment have turned blank check mergers into a popular financing vehicle, attracting celebrity backers like former New York Yankees outfielder Alex Rodriguez and NFL center fielder-turned-activist Colin Kaepernick, all willing to arrange blank checks.
“You had a bunch of SPAC sponsors looking to take companies public that weren’t able to go public the normal way for all the right reasons: they didn’t have scale, they weren’t profitable and they weren’t ready for prime time,” said Greg Martin, co-founder of SPAC. Rainmaker Securities. “But the SPAC guys came in with crazy valuation offers, it was almost like a bribe.”
Another black eye
WeWork’s SPAC partnership with BowX Acquisition Corp. $1.3 billion with investors such as Insight Partners, funds managed by Starwood Capital Group, and Fidelity Management. They were among those who bought at $10 through a private investment in public equity, or PIPE.
But the cash infusion wasn’t enough as the company’s shares fell with a 1-for-40 reverse stock split, extending the company’s life by a few months.
Its bankruptcy ends the saga that burned through billions of Softbank Group Inc.’s money. The filing came roughly 18 hours after trading was halted as speculation swirled about its demise and co-founder Adam Neumann issued a statement saying WeWork could rise again.
WeWork is among 139 SPACs — companies that have successfully merged with a blank-check company — to question its viability this year, according to Bedrock AI, an investment research firm that examines regulatory documents. The percentage of companies that have merged with blank-check companies that raised concerns over the past four years is nearly double that of those that went public in the more traditional way, says the company, which analyzed reports from 392 SPACs.
As WeWork became another black eye for the SPAC industry, most sponsors have closed up shop, and even serial backers have turned to looking for the next big fad in the stock market.