SPAC: IPO Fast, Merge Young

Special Purpose Acquisition Company (SPAC) is a fascinating way to IPO (initial public offering) one (or multiple) companies. It is also very simple to understand: Raise money to a fund, go to “IPO” with that fund and acquire company stock with the capital. It is practically a shortcut compared to conventional IPO. There is also a catch, a SPAC should be complete in a limited time (usually two years) after the IPO. I am by no means a SPAC expert, so what follows is just some notes I take from various credible sources. Here we go.

Berk Orbay

Published in

DataBulls

4 min readDec 26, 2021

Not this one, though (Source: https://twitter.com/the_cdr/status/571379011886059520)

Brief History

SPACs are not a new invention. They actually exist since 1990s. There are periods of spikes and ebbs in the history of SPACs. Their latest resurgence in numbers and volume is the largest since the past decade or so. Even though majority of the popular SPACs are in the USA, there are versions in Europe and Asia as well.

According to SPAC Research study in June 2021, there are approximately 600 IPOs with more than $200B in proceeds since 2020. While sectors vary, tech and healthcare companies are major targets.

Players and Process

There are three main types of players in the formation of SPAC: Sponsors, Investors and Targets.

Sponsors (founders) are usually financial professionals who build the SPAC. At the end they take about 20% of the SPAC. They are responsible for getting investors and closing an acquisition/merger deal to spend SPAC money on before the deadline. They are basically orchestrators of the whole process.

Investors are the ones who put money to buy SPAC shares (usually) at the IPO. After the IPO is complete, raised money is put into an interest bearing trust. Investors can participate in other phases (e.g. PIPE investors) as well. If SPAC cannot merge with a target within the timeframe the trust dissolves and investors get their money back pro-rata (i.e. whatever is in the trust is proportionally to the initial investment of investors).

Targets are the companies which SPACs desire to merge with. The process is called Business Combination or “de-SPAC”. The process is of course delicate but also simple. If both the SPAC and the target are willing and agree on terms, merger happens. This process is usually a reverse merger which the private company gains control of the public company.

There are also other stakeholders such as underwriters, auditors, consultants, government officials etc., but these three pillars are the most important to understand the working of a SPAC.

Pros — Cons

SPAC is one of the fastest ways to IPO. While a traditional IPO takes at least several months to more than a year, a SPAC merger may happen in mere months.
It is less hassle for a target company to IPO through a SPAC than the whole process. Disclosures and paperwork are lighter but target should be capable of handling the responsibilities of a public company.
It is arguably cheaper to SPAC than to IPO. However, some claim it is cheaper because investors essentially bear the cost of IPO and are diluted through the process.
There are many high caliber institutional investors and advisors involved in SPACs including Goldman Sachs, JP Morgan and Morgan Stanley.
SPACs are the significant part of the IPOs in the recent years. They are the 68.5% of all IPOs in 2021 Q1.
SPACs might not be the best investment vehicle for short term returns, especially post-merger since February 2021.
Increased popularity attracted SEC attention and increased warnings to potential investors. In one case, they warned against the celebrity marketing.

Conclusion

SPACs are fascinating in their offerings of speed and convenience. They also prove to be a popular alternative to classical IPO in certain periods and their popularity booms in recent years. Though, it is uncertain whether the attention will stay for long due to financial and regulatory issues. However, the concept continues to evolve and perhaps, their popularity will be permanent this time. An example is the SPARC offering from Bill Ackman of Pershing Capital which sells the rights to buy SPAC shares instead of the shares themselves.