Everything You Need to Know About SPAC IPOs
For those of us that follow the public markets, it has been impossible to escape news of notable companies like Draft Kings, Virgin Galactic, and Nikola going public through a long-abandoned and unconventional method: using special-purpose acquisition companies (SPACs). Cutting through the complicated financial jargon, here is everything you need to know about SPACs and how they are being used to achieve IPO today.
What are SPACs?
SPACs are essentially shell companies that are created for the sole purpose of raising money through an IPO to acquire an existing company. SPACs are generally formed by investors with expertise in a particular industry or sector, with the intention of buying controlling stakes of companies in that area.
IPO investors rarely know the acquisition target of the SPACs they are investing in, which is why SPACs are frequently called “blank check companies”. However, if a given SPAC does not make an acquisition within 2 years of their IPO fundraising, all capital raised must be returned to the SPAC’s investors.
SPACs have been around for decades, but were largely abandoned when use of shell companies became widely known for use in unethical and illegal business activities.
Advantages to SPACs
Selling one’s company to a SPAC can add up to 20% to the sale price compared to a typical private equity deal.
Being acquired by a SPAC can also offer entrepreneurs a faster IPO process under the guidance of a more experienced partner. The SPAC is the company that IPOs, so the acquired company does not necessarily have to wait for the right timing and market sentiment to go public using this method.
SPACs offer a cheaper way for companies being acquired to go public, with less negotiation (SPAC owners work with underwriters rather than the entrepreneur doing so directly).
SPACs have become an avenue for smaller companies that don’t meet the requirements to go public through traditional channels (self-filing or traditional IPO) to do so nonetheless, so long as they have growth prospects significant enough to attract a SPAC acquisition.
With SPACs, investors can opt out of a deal and get their money back; they also have the chance to vote on any opportunity presented as a target acquisition. Thus, investors in SPACs get greater input into investment decisions than they would as a limited partner for a VC firm’s “blind pool”.
Disadvantages to SPACs
Greater investor input into SPAC acquisitions may in some cases sabotage the success of SPACs as the decisions are not solely being made by informed industry specialists (as they are in VC firms).
To further the above point, the ability of investors to reject a proposed acquisition adds another layer of risk to the IPO process that does not exist when achieving IPO through traditional channels.
SPACs can still fall victim to poor market receptivity, just as a traditional IPO can.
Governance issues may arise when the management team of the acquired company fuses with the management team of the SPAC. However, it should be noted that in traditional IPOs the management team faces similar challenges, with many of their private investors cashing out at IPO and new public investors taking their place.
Many investors believe that they could make better returns using other investment vehicles, due to the relatively long length of time that invested money can sit in a SPAC. There is also always the chance that the 2 year period expires and there is not an acquisition made. In this case, as stated earlier, the investor’s money is more or less returned back to them, but they have made nothing from their investment.
SPAC IPOs are flooding the market, with over 80 SPAC IPOs raising upwards of $31 billion in investment capital in 2020 alone. Some believe that SPACs are going to fundamentally change how companies IPO and some believe that SPACs are a trend destined to decline once again.
What do you think about SPACs? Leave a comment below to continue the discussion!
Excellent overview of SPACs. This article is succinct and very informative.