While many private companies have refrained from going public over the past two years due to a short-lived bear market and high interest rates, IPOs are making a comeback.
A group of recognizable companies have gone public or plan to do so in 2024, offering investors the opportunity to profit from newly listed stocks. But this time, special purpose acquisition companies, or SPACs, won’t be coming with us, at least not in their previous form.
SPAC mergers, a particular type of IPO, were a notable force on Wall Street at the start of the decade. These public listings occur by merging private companies with SPACs, a type of publicly traded shell company, a term for a company without significant business operations or assets created to secure financing. The private company (or target) then becomes public by taking on the symbol of the stock held by the SPAC.
These mergers became popular among companies that wanted to go public quickly, as SPAC mergers are faster than traditional IPOs or direct listings. They also became popular among investors because a SPAC that could find a particularly attractive private company to merge with could produce sizable profits. If the company went bankrupt, investors would receive their investment back. Therefore, in the early 1920s, as the number of retail traders grew, so did the number of SPACs seeking private companies to take public.
However, as IPOs see a resurgence this year, SPAC deals are likely to fall into obscurity due to a series of recent bankruptcies and regulatory policies.
What is an IPO?
IPOs are one of the most popular ways for private companies to go public. Traditional IPOs involve a significant amount of paperwork and corporate scrutiny by the Securities and Exchange Commission, after which underwriters selected by the company set the price of the company’s stock. On a predetermined date, the IPO shares become available on the stock market, taking the company public.
Since 2000, more than 6,000 companies have gone public via IPO. Of those, a record 1,035 came in 2021 alone, with companies like Coinbase, Robinhood and semiconductor maker GlobalFoundries going public and raising billions of dollars in cumulative capital. Perhaps even more surprising is the fact that SPAC IPOs have outnumbered traditional public offerings; nearly 750 of the IPOs that occurred that year were SPAC mergers.
The SPAC merger process involves the use of a shell company registered with the SEC and listed on the stock exchange with the specific purpose of purchasing a private company, making it tradable through the merger and undergoing the consequent “de-SPAC” phase, which transforms the shell company’s shares into shares of the target company.
These types of offers have different interests; Investors often buy shares of SPACs before they even have a company to merge with. A lot of faith is placed in the names associated with these shell companies that will use investor capital to create hype around an upcoming IPO.
Why SPACs are risky
According to the Financial Industry Regulatory Authority (FINRA), SPACs typically have 18 to 24 months to close on an acquisition of a target company. If they fail to do so, the SPAC is dissolved and the funds are returned to investors on a pro rata basis determined less costs and fees which, when added together, can result in substantial losses.
Even after the target company has undergone the SPAC merger process, the risk remains high. Companies going public via SPAC mergers over the past four years have seen shocking failure rates. Last year’s IPOs were marred by SPAC failures. At least 21 companies that went public in 2023 via SPAC mergers have failed, resulting in capital losses of more than $46 billion, according to data compiled by Bloomberg.
Part of the failure was due to how SPACs had the ability to provide financial projections based on non-public information, which the SEC doesn’t allow with traditional IPOs. This has led to companies overinflating valuations and investor expectations. Looking further back, the situation is even more dire. Of the companies that SPACs went public between 2020 and 2022, 277, or about 32%, were dissolved, or about double the historical rate before 2020 based on data from Valuation Research Corporation, an independent research firm. assessment and consultancy services.
IPOs are back, but will SPACs follow?
In the last two years, however, all types of public offerings have fallen out of favor. Higher interest rates prompted by Federal Reserve hikes have discouraged companies from going public, because higher rates eat away at earnings growth potential. For most investors, risk appetite had diminished due to inflation and market volatility, leading fewer to take risks on a newly listed company. As a result, the number of new SPAC mergers and traditional IPOs has declined significantly since the start of 2022.
However, the economy today looks very different than it will in 2022, and IPOs are starting to return. First, the Fed’s interest rate increases have succeeded in alleviating inflation and slowing the economy. And while there’s ambiguity about when the Fed’s first rate cut will occur, the easing provided by central bank policy so far has allowed more money to flow back into stocks, setting the stage for a resurgence in IPOs.
Since the end of 2023, more and more companies have gone public and, importantly, they have done so successfully. Semiconductor maker Arm’s September IPO, for example, saw the company raise more than $5 billion in a single day. Sandal maker Birkenstock raised more than $1 billion a month later. These two companies have seen their shares rise 122% and 29% respectively since their IPOs.
As of 2024, there have already been over 30 IPOs. But despite more favorable economic conditions, SPACs are less likely to recover in the same way. That’s because the SEC approved a series of SPAC regulatory changes in January that throw cold water on the entire practice.
The SEC now requires target companies to register with the SEC itself rather than jointly signing with the SPAC, and also requires much more in-depth disclosures from companies about conflicts of interest, stock dilution and post-merger transition details. among other conditions. These changes are aimed above all at protecting the investor by further lowering the curtain on these operations. But they further complicate the already complex process, thus making it unlikely that SPACs will see the same resurgence experienced by traditional IPOs.
Stock IPOs of 2024: Reddit and more
This year is likely to see an increase in IPOs as the recent risks associated with going public continue to fade. Many investors have adopted risk-averse strategies resulting in increased liquidity, and with the overall market moving in a more bullish direction, private companies see this as an environment where they feel comfortable raising capital through a ‘IPO.
There are seven companies with IPOs scheduled in the near future and two more that are priced and ready to receive a release date. These include artificial intelligence companies such as Astera Labs, environmental technology company RanMarine Technology, and commercial real estate company Massimo Group. However, it is the IPO of social media giant Reddit, expected at the end of March, that is attracting the most attention. The company is targeting a $6.4 billion valuation, with 22 million shares expected to open at a price between $31 and $34.
Additionally, there are a handful of well-known brands that investors expect to trade publicly this year. Panera Bread, for example, sought a public listing via SPAC merger in 2022 before the deal fell through. With the more favorable environment, there is more reason for the company to go public this year.
Fast fashion company Shein files for IPO in 2023; However, that particular statement is embroiled in a larger political controversy as it is a Chinese company, but it still plans to trade publicly and is exploring its options. Rumors have circulated that Kim Kardashian’s brand, Skims, as well as fintech companies Stripe and Chime are expected to go public this year, although no paperwork has yet been filed.
Is it a good idea to invest in IPOs?
Technically, retail investors aren’t the first to get involved when a company goes public; Initially, IPO shares are often only accessible to accredited traders and institutions. Some IPOs will have shares reserved for retail traders, but the usual way to get into IPO shares is to meet certain criteria, such as having a certain threshold of money ($100,000 to $500,000 or more) invested with the brokerage or running a intermediation operation. a certain number of operations each year.
Where IPO shares are Not Left aside for retail traders, the first opportunity to invest in a newly public company is to simply buy shares on the day the target company goes public. So is it a good idea to invest in an IPO? It depends on your particular desires as a trader.
For a long-term, fundamental-oriented investor, IPOs may not be a particularly attractive investment. Not knowing the full extent of a company’s financials and other details might make this type of trader think twice. This is also not an irrational concern; companies are typically quite unprofitable after their IPOs. Nasdaq research shows that only about 1 in 5 of all companies that launch an IPO become profitable.
But from other points of view, IPOs are worth considering. They represent one of the first opportunities investors have to take ownership of a company, and getting in early means potentially paying the lowest possible cost for those shares. This is especially true for a well-known company like Reddit or Shein, where brand hype alone can boost stock prices.
The decision ultimately depends on whether investors believe the price set for the stock is fair, whether there is a likelihood for a profitable future for the company, and the investor’s comfort level with risk.
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