23andMe is bankrupt, which emphasizes the enormous risks involved in funding many of the companies that have gone public via mergers with special-purpose acquisition organizations.
Companies that choose conventional initial public offerings set roadshows with potential investors that focus especially on their financial situation. Executives usually wait until they have more established companies before proceeding with an IPO since they expect such kind of grilling.
Mergers with SPACs have proven a means for businesses to obtain public-market listings without running into the intense scrutiny of the IPO process, though. A private firm choosing to make acquisitions will choose to merge with an already listed blank-check company. The SPAC then translates its ticker symbol and name into one that fits the name of the acquired company. Because there were less regulations and less strict disclosure laws, this method in the past first tended to draw higher risk, early stage enterprises.
British billionaire magnate Richard Branson created a SPAC when 23and Me Holding Co. (ME) combined in 2021. The purchase was worth $3.5 billion, and following the offering the corporation claimed a pro-forma cash balance of more than $900 million.
A few months later, when 23andMe answered investors on its earnings call for the June quarter, it had $777 million in cash, a sign of the cash loads linked with the SPAC process. Companies have to offer their sponsors twenty percent of the ownership.
“The costs are so high,” said Michael Klausner, a Stanford University Law School business and law professor who has been investigating and writing about the risks of SPACs and their dilutive features for several years. “The cash out the door is higher than what the underwriters are paid” he said in a conventional IPO.
Startups’ lifeblood is cash; many public de-SPACs nonetheless resemble startups. They also need a lot of money, particularly if they are not making much. Revenue at 23andMe finally slowed since consumers only needed to buy the DNA test kits once. Its attempts in medication research and telemedicine expansion brought little income.
For its September quarter, 23and Me declared earnings showing $44 million in income. That was down from $50 million year before and $55 million in the September quarter of 2021, just following the SPAC transaction. Its cash and equivalents last November totaled $127 million.
For investors, the voyage has been unpleasant. The stock belonging to its merger partner sold north of $266 just before the 23andMe SPAC transaction concluded. Shares trade under a dollar these days. Now the surviving board is considering selling their enormous collection of consumer genetic data.
Though they had been operating for years, SPACs gained popularity on Wall Street in the immediate post-pandemic era, revitalising a dead IPO market. Notwithstanding warnings and tighter Securities and Exchange Commission rules including more new rules earlier this year requiring improved disclosures, which more closely match traditional IPOs, they still fill the U.S. IPO market and gained popularity once more this year.
As it happens, 23andMe is not the only de-SPAC firm failing. Since 2022, Debtwire’s restructuring database records 40 bankruptcies among publically traded companies that merged with blank-check corporations.
John Bringardner, the executive editor of Debtwire, emailed MarketWatch saying, “The frenzy of 2021 saw funding going to lots of troubled names that, frankly, never should have received this kind of financing in the first place.”
Mostly Chapter 11 reorganization of struggling companies—including some well-known catastrophes like WeWork, Bird Global, and Lordstown Motors that were able to re-emerge as lean businesses—the bankruptcies have been Chapter 11 restructurings of failed enterprises. He also mentioned two Chapter 7s, or direct liquidations: Electric Last Mile Solutions, a commercial electric vehicle manufacturer, and Babylon Health, a digital healthcare company.
Another de-SPAC company drew market attention this week as its shares sank significantly. With plans to spend between $65 million to $80 million, up from the $38.4 million it spent in 2024, nuclear energy startup Oklo Inc. (OKLO), which currently has no income, suffered a bigger annual net loss and Monday, said investors. This week’s share dropped 17.6%.
Originally poorly regarded, Oklo went public in May 2024 in a deal until Microsoft and Amazon started purchasing nuclear power plants to meet their AI data center power needs. Early February saw Oklo’s shares soar beyond $55 as nuclear energy became a hot commodity for computer behemoths. It has rapidly dropped more than half its worth since then.
Another issue with SPACs is that, should they not find an acquisition target, usually within two years, the blank-check business itself must be returned to investors and liquidated, therefore providing the idea that the transaction is risk-free.
Certain corporations must redeem the investors as they cannot identify suitable acquisition targets. “Redemption rates are quite high,” said Klausner, speaking of the procedure wherein blank-check corporations must reimburse funds to investors.
Klausner has extensively written and litigated on the significant diluting in SPAC transactions. He reported in January that just 14% of the SPACs that included 2019 and 2022 were trading above $10.
“They won’t leave,” he remarked. “They are hobbling along, much to my dismay, and I wish there were no actual investors losing money. The market, the SEC, the courts—all of which have forewarned them. If they still wish to gamble, it presents challenges for them.
