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Challenges Concerning Valuations
An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001
discussions below not only showcase the challenges faced in other jurisdictions in terms of mergers and acquisitions by SPACs, but also highlight the potential concerns which may be faced in India.
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Challenges Concerning Valuations
For the SPAC to acquire any target company, it is important for the target companies to disclose the valuation of their assets. These assets include buildings, real estate properties and intangible assets like trademarks, copyrights, brand goodwill and the like. The target companies have to undertake rigorous procedures and provide details to support the valuation of the said company. The target companies have the option to hire external entities for the purpose of evaluation. However, considering the complexities involved, valuation of a company is often considered to be a complex judgement due to the multiplicity of estimations that are possible.28 Apart from the challenges concerning initial estimates, anecdotal evidence suggests that share prices of the SPACs have decreased by over 33% on an average in the first twelve months of merger.29 This downfall may be noticed even after the executives concerned test the fair market value of the assets when there is an economic volatility after the merger. Data suggests that share dilution in structure that takes place upon the merger is the primary reason for such reduction in the valuation. The major reason is that the share dilution occurs with respect to the shares of the promoters which is generally around 20% of SPACs stock. Since the promoters would have incurred expenditure for the purpose of processing IPOs and incurred the costs thereof, in the postacquisition company the shares are diluted. The challenges
challenges-around-valuations-controls-11618350611> accessed 19 September 2021. 28 Mark Maurer, ‘Companies Merging With SPACs Face Challenges Around Valuations, Controls’ (The Wall Street Journal, 13 April 2021) <https://www.wsj.com/articles/companies-merging-with-spacs-facechallenges-around-valuations-controls-11618350611> accessed 19 September 2021. 29 Dayton Nordin and Mayis Kirakosyan, ‘Three SPAC M&A Risk Factors and Ways to Mitigate Them’, (E&Y, 19 May 2021) <https://www.ey.com/en_us/strategy-transactions/spac-m-a-risk-factorsand-ways-to-mitigate-them> accessed 19 September 2021.
