June 2023 – SPACs Give Their Goodwill Back

Sometimes companies throw a business-related Hail Mary pass and hope for the best.  But many of the pass attempts by companies that went public through the non-traditional IPO process known as SPACs (Special Purpose Acquisition Companies) in the past 2 years have landed incomplete.  Including a SPAC from former NFL quarterback Colin Kaepernick, which cost investors millions as it liquidated.

And now it seems that goodwill toward SPACs is almost all gone – literally.  The Wall Street Journal estimates that companies that went public through SPACs recorded at least $11.6 billion in goodwill write-downs in 2022, compared with only $4 million in 2020.  While 2022 was a bad year for goodwill impairments overall with $129 billion in U.S. pretax impairments, the SPAC-spawned company write-downs occurred in a relatively small group of companies.

Companies emerging from SPAC IPOs (the “de-SPAC”) are especially prone to goodwill impairments because more of the purchase price for SPAC acquisition targets is placed into goodwill than in standard mergers and acquisitions.  Goodwill is notoriously difficult to value as it is an intangible asset based on future estimates of growth, profit, and synergies that can rapidly change during and after the M&A process is completed.

We often discuss the concept of goodwill at PriSim’s classes and how impairments can affect a company’s earnings.  For a quick refresher, here’s an overview of goodwill from a prior PriSim post, of impairments from accounting firm EY, and of SPACs from the Harvard Business Review and the SEC.

Though it seems SPACs have had their day and their popularity as an alternative to the traditional IPO process is waning, the write-down hangover from overindulgence in SPAC-related goodwill could be far from over.