Key Highlights

● Armada II plunged after shareholders approved the Evernorth combination.

● The stock fell to $26.49 in premarket trading and slid further later.

● The vote was the only identified news.

● The S&P 500 rose to a record while the SPAC slid.

Armada Acquisition Corp. II (NASDAQ:XRPN), a special purpose acquisition company listed on the Nasdaq under the ticker XRPN, plunged on Tuesday, Oct. 6, after its shareholders approved the company's Business combination with Evernorth Holdings.

The stock fell to $26.49 in premarket trading, and the decline deepened later in the day.

How SPACs work

A special purpose acquisition company is a shell company that raises money through an initial public offering with the goal of merging with a private business, taking it public in the process. Investors in the SPAC are buying into a promise of a future deal rather than an operating company, and the eventual target may not be known when they first invest. SPACs typically have a set deadline to complete a merger.

Once a target is found, shareholders vote on the merger. Typically they can also choose to redeem their shares for a portion of the cash held in the SPAC's trust account rather than staying in for the combined company. After the deal closes, the SPAC's shares become shares of the merged business.

Why the final stretch can be volatile

The period around a SPAC vote and Merger is often turbulent. A few common factors can play a part. Redemptions can shrink the number of shares available to trade, which can lead to sharp moves in either direction. Investors who bought in anticipation of the deal may sell once it is approved, a pattern sometimes described as buying the rumor and selling the news. And the shares begin to trade on the prospects of the combined company rather than on expectations.

It is not clear which, if any, of these factors applied to Armada II on Tuesday. The Shareholder approval itself was the only identified news for the stock.

The market around it

Armada II was one of several smaller stocks posting dramatic moves on Tuesday. NFT Limited pulled back after an explosive jump on Monday, and several micro-caps tumbled. Decent Holding and YYForce slid after announcing share offerings.

The SPAC's slide stood in sharp contrast with the broader market. The S&P 500 rose 44.98 points to a record 7,818.93, and the Nasdaq Composite closed at a record just under 27,600. The Dow Jones Industrial Average gained 253.38 points. Large technology companies such as Marvell Technology (NASDAQ:MRVL) and Advanced Micro Devices (NASDAQ:AMD) led the gains, while utilities rallied after Constellation Energy (NASDAQ:CEG) signed a 20-year nuclear Supply deal with Google.

Smaller companies had a rougher day. The Russell 2000 slipped to about 2,830, and on the Nasdaq, decliners outnumbered advancers.

Redemption Filings Will Show What Is Left for Evernorth

Investors will look for the formal completion of the Evernorth combination, any filings detailing shareholder redemptions, and the start of trading under the combined company's identity. Details on how much cash remains after redemptions could shape how the market values the new company. For the wider market, the Federal Reserve's September minutes arrive on Wednesday afternoon.