Over the past decade, special purpose acquisition companies (“SPACs”) became a prominent method for private companies to go public through a merger transaction (“de-SPAC”) between a publicly-listed SPAC and a private company.

The SPAC boom peaked in 2020 and 2021 when there were 248 and 613 SPACs representing the majority of all IPOs both years. SPAC activity then began to decline after its boom in popularity attracted increased scrutiny from the SEC and its staff, including new accounting guidance that slowed the rate of SEC SPAC approvals. Moreover, articles published in 2022 and 2023 by Stanford Law Professor Michael Klausner and co-authors asserted that SPACs result in significant dilution of the initial shareholders in a SPAC that remain invested over the lifecycle of the de-SPAC merger process. They measured this supposed dilution using a metric they refer to as “net cash per share” (“NCPS”) and find that cash dilution for SPAC investors is 43%.

In 2023, persuaded in part by Klausner et al.’s analysis, the Delaware Court of Chancery declined to dismiss claims of breach of fiduciary duty in multiple cases where NCPS was not disclosed, and in 2024 the SEC finalized rules intended to better protect SPAC investors by increasing liability risk for underwriters of SPACs as well as mandating effective disclosure of NCPS. For year-to-date 2024, the number of SPAC IPOs decreased by 92% relative to their 2021 peak, while the number of de-SPAC transactions decreased by 66% over the same period.

Given the regulatory, legal, and market influence of Klausner et al.’s theory, we therefore set out to examine whether SPAC investors are substantially diluted by the de-SPAC process by evaluating whether NCPS is in fact a meaningful indicator of investor dilution.

In our paper, we demonstrate that NCPS should be irrelevant to the regulation of capital markets. First, we show theoretically why NCPS is not an appropriate measure of SPAC shareholder dilution and that the de-SPAC process is not highly dilutive of non-redeeming SPAC shareholders. Second, we show empirically that NCPS is not predictive of the future performance of the post-merger public company, and therefore does not convey meaningful information about the value of the shares the SPAC shareholders receive at the time of merger.

Net Cash Per Share and Dilution

Klausner et al. refer to “dilution” as the reduction of cash that a SPAC brings to the de-SPAC merger. To estimate cash dilution, Klausner et al. convert SPAC characteristics, including sponsor promote, PIPE investment and investor redemptions, into costs that reduce the amount of cash per share that the SPAC will bring to the merger. They call the resulting figure “net cash per share.” For the median SPAC in their 2022 study, a non-redeeming SPAC investor’s initial $10/share cash investment is diluted to $5.70/share prior to the de-SPAC merger, representing a substantial 43% dilution.

But Klausner et al.’s take on dilution is far too bleak. They are wrongly focused on cash dilution, but as our study shows, cash represents only 7% of the value of the merged public company and thus, cash dilution has a relatively small effect on the value of a non-redeeming investor’s shares.

We present two more accurate measures of dilution, neither of which support the contention that SPACs are highly dilutive – (1) the post-merger ownership stake of non-redeeming SPAC investors; and (2) the value of a non-redeeming investor’s ownership stake in the post-merger company.

First, we find that the SPAC process results in an increase in a non-redeeming shareholder’s equity stake in the combined company of approximately 5% immediately after merger. We present a series of de-SPAC merger scenarios, beginning with a baseline SPAC showing only a merger between a SPAC and a target. We then analyze the impact of each SPAC characteristic (e.g., sponsor promote and PIPE investments as well as redemptions) on the equity stake of a non-redeeming investor (“Investor A”). In our baseline, Investor A owns 4.17% of the post-merger company. In our final scenario, layering in the effects of the sponsor promote, redemptions, PIPE investment, and fees on Investor A’s ownership stake, we find that Investor A owns 4.39% of the post-merger company, an increase of approximately 5%.

Second, we find that the value of each share in the median post-merger company is $9.45/share. As non-redeeming shareholders buy into the SPAC at $10/share, this results in a dilution of the value of such shareholder’s shares of 5.5%. We find a 5.5% reduction in share value plausible, representing what the non-redeeming SPAC shareholders are willing to pay as the cost of going public. Indeed, this cost of going public for SPAC investors is lower than it is for owners of private companies that go public through a traditional IPO, which is typically underpriced by 20%.

We therefore conclude that the SPAC process is not highly dilutive of non-redeeming SPAC shareholders.

Net Cash Per Share and Post-Merger Stock Price Performance

It is still possible that the 43% reduction in cash during the de-SPAC process could negatively affect the future performance of the merged company, because the merged company has less cash to invest in growth. If true, then NCPS could be relevant to disclose to investors. Indeed, Klausner and co-authors’ 2022 article studying 47 de-SPAC mergers purports to establish a strong negative correlation between a SPAC’s NCPS and post-merger stock price performance.

However, subsequent refinements of the model along with more data chipped away at the strength of the results. The initial empirical study was followed with an expanded study of 243 de-SPAC mergers (Klausner and Ohlrogge 2023). In this study, when Klausner and Ohlrogge try to control for other explanatory variables, the statistical significance of the net cash per share measure disappears – just the opposite of the point they were seeking to prove. However, this critical finding is buried in a footnote. Thus, in their most complete models controlling for redemptions and PIPE financing, NCPS is irrelevant as there is no statistically significant relationship between NCPS and post-merger performance. We constructed the NCPS measure ourselves and replicated the regressions, yielding similar results.

Thus, we conclude that the SPAC process is not highly dilutive of SPAC investors and that NCPS should be irrelevant to the regulation of capital markets.