SPAC (Special-purpose acquisition company) are companies that raise funds to buy businesses. They are also known as “dummies” because they do not initially have a specific target organization for the merger. Recently, their popularity has grown markedly: in January, they received almost $ 26 billion in share sales, compared with $ 13.6 billion for all of 2019. Russia is also considering the idea of admitting companies without assets to IPOs.
We present a detailed analysis of SPAC: reasons for the growth in popularity, advantages and disadvantages, as well as predictions for the future.
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SPAC raises funds through IPOs by selling stakes in shares and warrants, usually worth $ 10. A warrant is a security that gives the holder the right to buy a proportional number of shares at a specified price for a specified period of time, usually at a lower price than the current market price. Typically, SPAC has two years to find the merger and complete the deal. If SPAC investors do not approve of the planned purchase, they can sell their shares while maintaining the warrants. This gives them the opportunity to make a profit even in those trades that they refused. In this state of affairs, SPAC is considered a win-win, especially in times of volatile markets. After the merger is completed, the acquired property becomes a public company.
According to Bloomberg, the first SPAC listed was in 1993. Previously, cooperation with such a company was seen as a last resort if the business was unable to enter the market through a regular IPO or attract financial and strategic investors willing to complete a takeover transaction.
Before the boom of the end of 2019, the previous record was set in 2007 during the financial crisis: $ 6 billion was raised.In 2020, this amount was $ 83 billion.After the end of the financial crisis, investing in IPOs without transactions lost their meaning, and almost all SPACs disappeared.
Reasons for revival
For SPAC sponsors, this approach offers faster capital turnover in contrast to private equity funds, which typically operate over a 10-year period. As more well-known and experienced investors began to enter the sector, its attractiveness in the eyes of others increased. Large banks have also formalized the SPAC business.
The pandemic has increased market volatility and the risks of an IPO. At the same time, the US Federal Reserve System supplied the market with additional funds. This led to a decrease in profitability. In turn, SPAC offered a higher profit perspective with some loss protection provided by the buyout option. In addition, venture capital and private equity funds, which had invested in private companies for a decade, began looking for exit options, mostly non-IPOs.
Types of deals
The SPAC sector carries out transactions of various variations.
- According to Bloomberg, 16 deals totaling $ 12.5 billion were announced in January. The largest of these was the Foley Trasimene Acquisition Corp. merger. and Alight Solutions worth $ 3 billion.
- In the same month, Social Finance Inc. announced that it plans to merge with SPAC, which values it at $ 8.7 billion.
- In February, businessman Tillman Fertitta announced that he was listing his restaurant and casino empire through SPAC, which valued the company at $ 6.6 billion, including debt.
Typically, in a merger, SPAC is named the acquired business.
For companies seeking access to public markets, a reverse merger with SPAC is an increasingly attractive alternative to the traditional IPO route. This is especially true in futuristic industries such as space tourism and electric vehicles. These companies, which have not yet received income, can declare their future financial capabilities through SPAC listing, which is not acceptable in an IPO.
One of the main advantages of going public through SPAC is the shorter listing time compared to a regular IPO. The attractiveness of such a merger also lies in the fact that the transaction is made at a fixed price, negotiated privately. After its official completion, the path to the public market is open, which means that no excitement is likely to interfere with further movement.
SPAC does not offer the cheapest deal, as the associated fees can add to its value. And while companies don’t pay the usual 5-7% IPO fees to investment banks, the cost of capital in a SPAC deal could end up being higher. In addition, the process is not always faster than a traditional IPO: the US Securities and Exchange Commission imposes similar requirements on both IPOs and SPAC listings.
Pros for sponsors and investors
- SPAC sponsors buy so-called founders’ shares and warrants. In many cases, in a post-merger company, the founder’s share may be 20% of the total outstanding shares.
- Investors are attracted to SPAC by limiting recessions and yields. The raised capital remains in the trust and is often invested in short-term US government bonds prior to the merger with the target company. Thus, the investor can buy back the common shares with the main investment and the accumulated interest.
- If SPAC cannot find a suitable company and close the deal within a certain period of time, then the money is returned to the investors.
Some also treat SPAC as closed-end funds: they buy shares when they sell for less than the value of the funds held in the trust fund and sell at a higher price, which usually rises after a deal is announced.
How warrants work
Early SPAC investors buy units, usually consisting of a common share and a warrant fraction to acquire more shares at a later date. Warrants give investors the opportunity to receive additional compensation for their investment, but they lose their value if SPAC fails to close the deal.
Otherwise, holders can purchase more shares by returning their warrants. They typically invest $ 11.50 apiece, which is a tempting proposition for those confident that their value will rise once the merger is complete and when it goes to market. However, the availability of available warrants could negatively impact the common stock.
Pros for retail investors
Both mature companies and start-ups who have no sales or products have resorted to mergers with SPAC. Here, as in conventional investing, it all depends on the specific case. SPAC is a kind of blind investment: the investor can only believe that the company is capable of finding and closing a deal with a reliable company with growth potential.
However, SPAC is also at risk, especially if investors buy shares after the deal has been announced and their price has soared above $ 10. After its completion, their value may fall: over the past year, 11 of the 18 companies that entered the market through SPAC, traded at less than $ 10 per share. Part of SPAC is a bet on the ability of sponsors – usually investment managers and high-profile executives.
Forecasts for the future
SPAC may not be able to fully cover the market. In 2020, companies that go public through traditional IPOs raised almost $ 100 billion on US exchanges. These include the listing of Snowflake Inc. worth $ 3.86 billion, as well as Airbnb and DoorDash offerings. This year’s IPO already includes the listings of Shoals Technologies Group and Playtika Holding Corp. worth more than $ 2 billion.
Source: Rusbase by rb.ru.
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