Special purpose acquisition companies (SPACs) are shell companies formed with the sole purpose of raising capital through initial public offerings (IPOs) and using the proceeds to acquire private operating companies. While traditionally regarded as vehicles for backdoor listings of weaker companies, in recent years the SPAC market has become a viable alternative to the traditional IPO market.

Frequently, SPACs look for foreign targets. These cross-border deals present both opportunities and challenges that can significantly affect outcomes and returns. For instance, tapping foreign markets offers SPAC shareholders expanded investment opportunities, which can lead to enhanced returns. On the other hand, differences in accounting standards, corporate governance norms, and regulatory environments introduce asymmetric information to SPAC transactions, which are already perceived as lacking transparency.[1] The difficulty in assessing a foreign target’s value – and its potential negative impact on returns – is an important issue especially in the SPAC market due to the misalignment of interests between SPAC shareholders and sponsors. Sponsors have a strong financial incentive to consummate a merger at any cost because a large portion of their compensation is contingent on deal completion within the required time frame, typically 18 to 24 months. Our latest research delves into these complexities, aiming to gain insights into the characteristics and performance of cross-border SPAC transactions.

In our study, we examine 1,737 SPAC IPOs filed with the Securities and Exchange Commission (SEC) between 2003 and 2022. We document that out of 537 U.S. SPACs that completed mergers during the 2003–2022 period, 133 acquired foreign targets. That is nearly one in four SPAC deals. The majority of SPACs that had chosen to declare a geographic focus in their IPO filings successfully acquired a target from their desired country or geographic region. China, being the world’s second-largest economy, is frequently mentioned in SPAC IPO filings as a desired target location, and Chinese firms constitute the largest group of acquired foreign targets among completed SPAC deals (43 out of 133). This is presumably because China’s economic growth makes it a promising source of investment. Furthermore, China’s move toward more restrictive foreign-listing policies for reasons including data privacy and national security[2] has hampered the ability of Chinese companies to list and raise capital in the U.S. market via traditional IPOs, potentially making alternative paths, such as SPACs, more attractive.

Our further analysis uncovers notable distinctions between deals involving domestic and foreign targets at different stages of the process. We find that having a geographic focus, in particular on China, significantly extends the search time needed to find a target firm. Additionally, cross-border SPAC mergers take longer to complete. We also document that the market reaction is significantly less positive to announcements of cross-border SPAC deals, especially those involving target firms from China or other emerging markets, than to announcements of domestic acquisitions. This may signal investor concerns over greater information asymmetry and risk associated with cross-border investments.

After a SPAC merger is completed, the surviving company becomes a publicly listed firm with business operations. We examine the post-merger operating and stock performance of these surviving companies, based on their target location. We observe that, compared with the median U.S. target firm in the sample, the median foreign counterpart tends to be smaller. However, regardless of their target’s origin, all SPACs generally exhibit poor post-merger operating performance. With respect to stock performance, we find that SPACs yield negative market-adjusted returns over a one-year period after the merger, with SPACs with foreign targets performing worse than those with U.S. targets. SPACs with Chinese target firms suffer the worst stock performance. Interestingly, SPACs that acquired firms from other (non-China) emerging markets produce considerably better, although still negative, one-year post-merger returns than the rest of their peers.

Our findings also reveal that differences in investor protection laws and accounting standards significantly affect stock returns of merged firms. Specifically, SPACs with acquisition targets from countries with higher accounting standards enjoy better post-merger stock performance, reflecting the importance of reduced information asymmetry. Furthermore, SPACs with targets from countries with weak investor rights and protection also fare better. While this finding may appear to be counterintuitive, it may reflect spillover effects documented in the cross-border M&A literature, where acquired firms with weaker corporate governance adopt more stringent governance standards of their acquirers, leading to more merger synergies.

Our research suggests that post-merger financial performance of SPACs is not uniform and that the target location may play an important role in it. For SPAC investors, understanding the regulatory and governance landscape of target countries is essential for making informed investment decisions.

ENDNOTES

[1] For example, until very recently, SPAC mergers enjoyed liability protection for forward-looking disclosure under the Private Securities Litigation Reform Act of 1995 (PSLRA) safe harbor. In 2024, in a move aimed at enhancing disclosure and investor protection in SPAC transactions, the Securities and Exchange Commission (SEC) adopted new rules that made the PSLRA safe harbor unavailable to SPACs. (SEC Final Rule Release No. 33-11265, Special Purpose Acquisition Companies, Shell Companies, and Projections (January 24, 2024). https://www.sec.gov/files/rules/final/2024/33-11265.pdf).

[2] “China Widens Clampdown on Overseas Listings with Pre-IPO Review of Firms with Large User Data.” Reuters. https://www.reuters.com/world/china/china-widens-clampdown-overseas-listings-with-pre-ipo-review-firms-with-large-2021-07-10/.

This post comes to us from Ekaterina E. Emm at Seattle University’s Albers School of Business and Economics, Bo Han at Seattle University, and Bochen Li at Monmouth University’s Leon Hess Business School. It is based on their recent article, “Cross-border acquisitions: The case of SPACs,” available here.