The ABCs of SPACs and de-SPAC’ed Entities
January 23, 2023 | Blog
What is a SPAC?
SPAC is an acronym for Special Purpose Acquisition Company, sometimes referred to as a ‘blank check company’ or ‘shell corporation’.
A SPAC is an entity with no business operations and is designed to go public based solely on an investment thesis, such as ultimately identifying a target company to merge with or acquire within a limited timeframe.
A SPAC has between 18 and 24 months to find and merge with a target company via the de-SPAC process or return the raised capital to investors.
What is a de-SPAC?
A de-SPAC is the process whereby a SPAC merges with or acquires a private company.
The resultant entity is (essentially) the private company in a publicly traded form with access to the capital raised by the SPAC.
While the result of the de-SPAC process is simply a publicly traded company, we’ll use the term “de-SPAC’ed entity” to mean private companies that went public through a SPAC.
Why would a company go public via a SPAC versus a traditional IPO?
A traditional IPO process can take up to 24 months. A typical one-to-one buy-side process, essentially a de-SPAC, takes far less time (as quickly as 3 to 4 months).
Pro-SPAC commentators argue that going public via a SPAC is cheaper than a traditional IPO when you include the underwriting fees, generally between 5% and 7%, and the IPO underpricing of 15% - 25%.
However, pro-traditional IPO commentators counter that there are dilution costs associated with SPACs such as the SPAC Sponsors compensation, the promote, which is usually 20% of the common equity.
Because the SPAC is an entirely new company, going public via a SPAC is less complicated than a traditional IPO. With a normal operating company, you would have to provide financials to the SEC, but with a SPAC, there are no financials to provide to the SEC.
- The SPAC goes through the SEC filing process – not the private company.
Normally, IPOs are priced so that share prices increase by 15% - 25% on the first day of trading – which is great for the IPO investors, but transfers value away from the entity itself. If the IPO shares are underpriced, this value transfer can be significant.
- For example, when LinkedIn went public in 2011, its shares doubled in value on the first day – going from $45 per share to $90. That is a lot of value the company passed to investors versus retaining for itself.
- A SPAC gives the company much more control over stock pricing, eliminating the risk of underpricing an IPO.
The demand for SPAC investment grew 11x between 2019 and 2021, from $13B to $143B, with similar growth in SPAC filings:
- 2019 – 59 filings, $13B raised
- 2020 – 246 filings, $73B raised
- 2021 – 638 filings, $143B raised
- 2022 – 86 filings, $24B raised
With nearly 900 SPACs raised in 2020 and 2021, and given a SPAC has between 18 and 24 months to find and complete a merger or acquisition with a target company (or return the raised capital to investors), many SPACs became too aggressive and overpaid for target companies, creating entities that are not returning the promised value to investors.
With the change in market conditions over the last year (increased inflation, interest rates etc.), there is concern that companies that went public via a SPAC in 2020 and 2021 will not be able to continue their business operations due to a lack of free cash flow or will face de-listing because their stock is not in compliance with the NYSE or NASDAQ requirements.
These companies may need to explore alternative options, such as rescue capital raises, full company sale to a strategic, bankruptcy, and PE take-private options, etc.
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