Zombie SPACs and Blood Baths

By John Kahn, Partner, CFGI

You may have heard about the massive spike in the popularity of SPACs, but have you heard about Zombie SPACs and Blood Baths? Writing this in Atlanta, Georgia, home of “The Walking Dead” TV show, makes it easier to appreciate that a “Zombie SPAC” is a SPAC without enough life left to deSPAC. In the same vein, so to speak, a “Blood Bath” is what the founders of a Zombie SPAC can be described as facing if their SPAC liquidates without completing its deSPAC transaction.

If the above is confusing, going back to basics may help. A “special purpose acquisition company” (SPAC), or “blank check company,” is a shell company that raises capital from investors via an IPO. The investors receive a share and some portion of a warrant in return for their $10 per share. (SPAC IPOs traditionally go out at $10 per share with $11.50 per warrant).

The capital raised through that IPO is held in escrow until the SPAC finds, obtains shareholder approval for, and completes a merger with an existing operating company (known as a deSPAC target), via a deSPAC transaction. A SPAC has up to two years to find and complete a merger with a deSPAC target. The cost of the search is funded by the sponsor of the SPAC. At the closing of a deSPAC Merger, the SPAC’s investors are entitled to redeem their shares in return for their original $10 per share plus their pro-rata portion of any interest accrued on the escrow account, while keeping their warrant. The investors also get their money back at the end of the two-year life if a deSPAC merger transaction has not been consummated.

SPACs have been around for many years and spiked in popularity once the COVID-19 pandemic arrived. Large, profitable companies that were overdue for a traditional IPO and more than ready to go public were some of the first operating companies to become deSPAC targets in the recent swell of deSPAC transactions. However, subsequent operating company deSPAC targets that haven’t been as large, profitable, or ready to go public, have found that the process of being acquired by a SPAC can be challenging, particularly as time has gone by and the market environment has changed significantly. This has contributed to a large number of SPACs not yet having completed their deSPAC transaction, as can be seen in the chart below, which shows the status, at the dates noted, by number of SPACs, of each year’s cohort of SPACs that at least filed for an IPO in the year noted. The chart shows data from November 2022 compared to updated data from March 2023.

The spike in SPAC IPOs that in many ways started in 2020 with COVID-19 peaked in Q1 of 2021 and then tapered off moving towards 2022, where the challenges came thick and fast. These challenges did not affect outcomes for the 2019 IPOs and have had a lesser effect on the deSPAC transactions of the SPACs with the 2020 IPOs that had in many cases already completed their mergers. However, many of the SPACs with 2021 IPOs have been very much affected. The Q1 2021 peak cohort of SPACs will see their two-year life spans expire by the end of Q1 2023, if they haven’t deSPACed in a timely manner. 

One of the biggest challenges for the SPACs and their deSPAC targets has been that the “growth at any cost” mantra that had been driving market value was replaced in late Q1 2022, with the market demanding and valuing profitability far more highly than growth. With this sea change, redemptions at closing of deSPAC mergers spiked, as investors near-unanimously voted to redeem their shares, a number of agreed transactions were terminated and the prospects of SPACs becoming “Zombie SPACs” with “Blood Baths” for their sponsors became very real.

A challenge that lengthens the time for which a SPAC could be a Zombie SPAC and end with a Blood Bath, is that ideal operating company deSPAC targets need to both have a profitability focus ahead of growth, and also already be public company ready. This includes historical financial statements uplifted to meet Public Company Accounting Oversight Board (PCAOB) standards and SEC requirements; auditors who meet PCAOB standards of independence (or else re-audits will be required which take extra time); corporate governance that meets listing exchange requirements; adequate internal controls and/or full disclosure of risks and uncertainties in the Form S-4 and/or other registration statements; and more, including potentially new computer systems and/or cyber security overhauls and upgrades, plus the need to be able to immediately fully meet all SEC reporting requirements starting at completion of the agreed merger.

If that sounds like too much to ask, you’d be right and it often is, at least without help from your and your audit firm(s)’ new best friends at CFGI. CFGI is happy to help in all aspects of deSPAC transactions, including advanced readiness work to make an operating company more attractive to potential suitors with a limited remaining life.

CFGI has deep experience in project managing the whole deSPAC process, as well as the disparate individual work streams, which can also substantially benefit by receiving assistance from, or even effectively outsourcing to, CFGI. These include: SPAC due-diligence work; helping deSPAC targets select new auditors, if needed; assisting with uplift of historical and going forward financial statements to PCAOB standards and SEC requirements; audit and/or re-audit preparation assistance; SEC registration statement drafting assistance, including pro-forma financial statement preparation; internal control development and documentation to meet public company audit and SOX requirements; assistance with remediating significant deficiencies and/or material weaknesses; new computer system selection and implementation; cyber security reviews and upgrades; plus more.

The more part can include providing interim services executives and/or managers, such as Chief Financial Officer (for bandwidth expansion, or until a permanent new hire is recruited and onboarded), Chief Accounting Officer, Head of internal Audit, Vice President of Finance, Vice President of Financial Planning and Analysis, Controller, and Director of Technical Accounting and SEC Reporting. It can also entail interim augmentation of other gaps in the team, including in respect to alleviating excessive demands on existing team members, which might otherwise lead to higher staff turnover.

Advance preparation is ever more important as SPACs get closer to their lives expiring. What can be a three- to nine-month process needs to be shortened as much as possible and the way to do this is by ensuring everything that possibly can be is buttoned up ahead of time. A prime example in this regard is using auditors who meet PCAOB independence standards and ensuring that all potentially relevant historical financial statements have been uplifted to PCAOB standards. This is done in order to make it as easy as feasible to complete a deSPAC transaction as quickly as possible.

Benefits for an operating company of going public via a deSPAC transaction, instead of using a traditional IPO to obtain the desired public currency and liquidity, include: not having to undertake a roadshow; setting the transaction price at the start instead of at the end of the process; potentially facing a quicker path to going public; having a more flexible capital structure and ability to retain control; gaining access to sponsors with expertise (“gray money” rather than just “green money”); and, at least before the SEC proposed rule changes, taking advantage of a frequently used ability to include financial projections.

These benefits, though, won’t necessarily outweigh the current market challenges, which indicates there will be more Zombie SPACs and Blood Baths in the coming months. Indeed, some SPACs already have or are seeking shareholder consent to “throw in the towel” and liquidate early in order to minimize their Blood Baths by stopping their searches sooner rather than later and not waiting out the full two years. In more recent developments, the new U.S. 1% excise tax on share buybacks that kicked in from January 1st, 2023 also affected SPAC redemptions and/or liquidations and a number of SPACs acted in Q4 2022 to make that a non-issue.

Not everything is negative. There have been successful SPACs, and also SPACs that didn’t do as badly as traditional IPOs when the market turned. Common themes for success have included: strong operators, with a specialized focus; value-added strategic partners; and SPAC process expertise. CFGI helps with the SPAC process expertise, even to the extent of being called upon mid-process to “pick up the pace.”

Get in touch: John Kahn is a Partner at CFGI with 25+ years of strategic and international financial experience, including CFO roles with private equity-backed, going public, and already public companies. He has worked extensively with deSPAC targets, including providing interim CFO and CAO services. John is also a Southeast USA-based leader of CFGI’s Private Equity Services Operational Excellence Team and a former Audit & Business Advisory Experienced Manager, who worked for Arthur Andersen in San Jose, CA and Cardiff, Wales, U.K. John can be contacted at

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