A lot of noise reverberated around the esports scene when FaZe Clan were forced to revise many of their financial estimates down in an amended S4 filing released at the end of last week. While the news seems bad on the face of it, looking as though it wiped close to half a billion dollars off the value of the org, it may not be quite as big a blow for the group as it first appeared.
What is a SPAC merger and how does it affect FaZe
Key to understanding the apparent change in financial plight is knowing FaZe are attempting to go ahead with what is known as a SPAC merger. This is a kind of deal where a shell company is created to attract investors, with the sole purpose of buying or merging with a single entity/type of entity. This is often with the intention of taking the purchased company public following the merger. In this case, FaZe were the target, with a takeover planned at a $1B valuation.
What has thrown a wrench into the works for FaZe is the fact the Securities and Exchange Commission (SEC) has recently begun to crack down on SPAC deals, and specifically unrealistic valuations attached to them. SPACs have long had a reputation for being risky investments. Many have led to big losses for those who bought in at the SPAC valuation, only to be disappointed when earnings reports didn’t live up to expectation.
As Forbes reported last year, when FaZe initially announced their SPAC deal, it came with a lofty $1B valuation for the group, which raised eyebrows in the scene. With the SEC cracking down on SPAC deals to protect investors, FaZe have been forced to abandon that rather optimistic price tag. The question now is whether the takeover can continue at all, given the hugely revised valuation.
Stronger regulation and a tighter market
As stated above, the change in valuation for the firm is as much about FaZe anticipating stronger regulation of the financial sector as anything else, alongside the tightening of the global market that will probably prompt a reduction in venture capitalism. SPAC deals are known as "blank cheque" for the fact investors typically have no idea which company they are even attempting to purchase, and commit funds to the pot, more hoping for a positive outcome rather than expecting one through an informed play.
This has led to losses for so many investors that financial outlets have been predicting a crackdown since at least the second half of 2021, and it seems that will soon be a reality. FaZe, knowing this — and equally seeing a tightening in the global market caused by factors beyond their control — have decided to go with what is probably just a more realistic valuation of their company rather than risk trying to go ahead with the somewhat optimistic $1B contract.
How bad is this for FaZe?
With all that in mind, it seems the main problem for FaZe was the timing of the deal. FaZe probably would have managed to push through if it had been proposed a year earlier and the new conditions may see it collapse altogether. In many ways, this means the revisions are most likely in line with what the owners of the company truly believe FaZe is worth, as opposed what they thought they could get away with, saying it was worth in an attempt to gain the maximum amount in the SPAC merger.
It is even possible that the long term effects of the increased regulations end up being positive for esports, as more realistic valuations will lead to better outcomes for investors and increased investor confidence. For now, the question for FaZe is whether they can go ahead with the original deal at all though, or if they need to totally restart the process with $450M gone from the value of their org.