April 27, 2025 – Released in March 1996, “Return of the Mack” became British R&B singer Mark Morrison’s signature hit song. Peaking at #2 on the Billboard Hot 100, the track details a personal comeback and triumph after a setback.
“Well, I tried to tell you so (Yes, I did)
But I guess you didn’t know
As the saddest story goes
Baby, now I got the flow”
Morrison’s above starting verse resembles the current consensus perspective regarding the Special Purpose Acquisition Company (SPAC) market. These securities faced some setbacks, the asset class was left for dead for several years, and then, out of nowhere, SPACs have now “got the flow” and are making a comeback. With blank check company Cantor Equity Partners announcing a very well-received merger with bitcoin treasury company Twenty One Capital this past week, which sent its shares skyrocketing, SPAC arbitrage is officially back:
Source: Google Finance
After announcing its $3.6 billion merger with Twenty One Capital, the SPAC shares rallied more than 200% from their cash value of just above $10.00 to trade north of $30.00 per share, demonstrating the tremendous upside optionality inherent to SPAC arbitrage.
SPACs are perhaps the most misunderstood security in the market today. Fundamentally, they represent the return of a Treasury bill (taxed as capital gains, not interest income) plus a free equity call option. The key aspect of SPAC arbitrage is the existence of untouched capital from the IPO invested in risk-free U.S. government securities, giving investors a baseline return of short-term treasury yields, combined with a set deadline offering the ability to redeem shares for the underlying net asset value (NAV, or the value of the treasuries plus accrued interest) either around the date of the vote for the SPAC’s business combination or its liquidation date. The inherent free equity call option, via the shares trading above NAV upon an announced merger that the market deems attractive, was extremely valuable in 2020 and early 2021, as many SPACs “popped” 50% or more upon their deal announcements. Between 2022 and 2024, the SPAC pop was nowhere to be found, the free equity call option inherent in the blank check structure did not produce results, and SPAC arbitrageurs were stuck with middling returns of Treasury bills plus a moderate spread. Safe to say, allocators lost interest and fled for greener pastures residing in the bull market of the NASDAQ growth index.
Nevertheless, this free upside exposure, combined with the vehicle’s inherent downside protection via its NAV redemption option, makes SPAC arbitrage perhaps the most attractive risk-adjusted return available in the market.
It is not just the Cantor Equity Partners SPAC that has demonstrated recent success in the market, although it has been the biggest winner thus far. There are a handful of SPACs that have displayed upside potential after announcing their merger, with several trading at significant premiums to their NAVs.
Source: Accelerate
Disclosure: Long CCIR, HOND, CEP, CLBR, and DMYY in the Accelerate Arbitrage Fund (TSX: ARB)
While the blank check industry has been fairly quiet since 2022, it has been making quite the comeback this year, with 27 new SPAC IPOs raising $5.0 billion year-to-date. The market is warming to SPAC mergers, and the Cantor Equity Partners / Twenty One Capital merger provides an “early warning” to market participants that sentiment toward the asset class has turned positive.
Surprisingly, SPAC activity tends to be somewhat countercyclical, booming on the back of the 2020 Covid bear market along with this year’s trade war crisis. Meanwhile, traditional merger and acquisition activity slowed markedly post “Liberation day” on April 2nd, amidst significant market volatility. This month, just seven traditional M&A deals worth an aggregate of $3.4 billion were announced in the U.S., the lowest level of transactions since May 2020. Three of the announced deals were bank mergers, with Columbia Banking System’s $2.0 billion merger with Pacific Premier Bancorp accounting for the majority of the deal value announced over the month.
Source: Accelerate
In contrast, M&A activity in Canada picked up with 3 deals announced worth $3.2 billion. Two of the announced mergers were gold mining deals, with China’s CMOC signing a $581 million agreement to acquire Lumina Gold and Canada’s Triple Flag Precious Metals entering a $421 million merger with Orogen Royalties. Amidst the on-again, off-again trade war between the U.S. and Canada, American shipping giant UPS announced the friendly acquisition of Ontario-based Andlauer Healthcare Group for $2.2 billion. What the Canadian government thinks of this deal is to be seen, and we expect heightened scrutiny from bureaucrats.
During the recent turbulent market conditions, a significant number of M&A deals were completed in April. Throughout the month, 23 deals worth a total of $53 billion were consummated, showcasing the definitive nature of merger agreements in which mergers and acquisitions close despite significant declines in broad asset prices.
Although the universe of pending mergers and acquisitions has shrunk this quarter, with deals closed vastly outweighing new transactions announced, we expect a deal resurgence once markets stabilize and volatility alleviates. When the Covid bear market hit in 2020, M&A activity declined precipitously, however, it was back to a normal level within six months.
Nevertheless, until then, look for SPACs to start to dominate the headlines, as the market segment returns to the front pages.
The trade war-led spike in market volatility, along with the quick bear market in stocks, has led some allocators to flee to the safety of short term bond funds. While short term bonds are a fine place to hide, allocators seeking the consistency and low volatility of returns provided by short term bonds could attain those characteristics along with potentially higher returns, in addition to tax efficiency, with merger arbitrage.
Source: Accelerate
While both strategies are low risk in nature, bond investors will never see a 200% return on one of their bond holdings as merger arbitrageurs recently experienced with the Cantor Equity Partners SPAC.
Regardless, the SPAC market remains dramatically under-owned, with multistrategy hedge funds and generalist investors fleeing the asset class en masse in 2022, leaving pure risk arbitrageurs to own the market. Accordingly, while this attractive upside optionality has just re-emerged, the vast majority of allocators are not yet participating in the strategy, and IPO allocations are still relatively easy to get full fills (for now). Equity upside plus Treasury bill downside is a powerful combination. We saw in 2020 what happens when this small, back water asset class becomes popular. Allocators should take note of the sea change that just occurred.
The AlphaRank.com Merger Monitor below represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized returns of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.
Each individual merger is assigned a risk rating:
- AA – a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
- A – a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
- BBB – a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
- BB – a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
- B – a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
- CCC – a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
- NR – a merger-rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.
The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.
