By Jamie McLean
Special Purpose Acquisition Companies (SPACS) are companies with “no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets” (SEC, 2005). They are established and managed by SPAC sponsors with the sole purpose of merging with a target company of their choice within a given timeframe, usually 18-36 months. SPACs raise money through an IPO typically issuing units consisting of one common stock share and one warrant, entitling the holder to later purchase one new share at a discount to the public price (Shiffman, 2009). The money raised in the IPO is placed into a protected ‘trust’ which accrues interest, and the significant proceeds of the trust normally are only permitted to be used in the completion of an acquisition. One of the key differences between SPACs and other ‘blank cheque’ companies is that public shareholders enjoy more protections, such as rights to vote on whether or not to go through with a transaction and, if they vote against the transaction, whether or not they would like to liquidate their shares at the point of transaction were it to go ahead. (Shiffman, 2009).
How does a SPAC come to acquire a company?
SPACs are led by a specialist management team, normally with experience managing companies within the industry of the target, investing in private equity and completing acquisitions (Shiffman, 2009).
Due to SPAC investor protections, investing in a SPAC at IPO “essentially constitutes a “riskless” zero-coupon bond, with an option on a future acquisition (if no transaction takes place, investors receive a pro rata share of the trust value, plus any accrued interest)”. As this is the case, it can be hard to incentivise investors to stay invested during an acquisition rather than vote against the deal. Thus, when management have identified a suitable acquisition target, they often undertake a roadshow to encourage investors to support the deal (Cumming, Hass and Schweizer, 2014).
If management are successful in the proxy vote and the deal is approved, then the acquisition is reviewed by regulators before becoming listed on the stock market through a reverse merger.
Image: SPAC Acquisition Process
How common are SPACs?
31% of US firms went public via a reverse merger with a SPAC in 2007 and 2008, before regulation and sentiment quashed their growth after the financial crisis, with only two SPAC acquisitions taking place in 2011 (Kolb and Tykvová, 2016). However, they are once again raising capital for acquisitions and in 2017 they comprised 6% of global IPO values (PwC, 2017). This fast growth has continued, with the number of SPAC IPOs increasing 28% in 2019, raising $13.6bn (SPAC Insider, 2020).
Graph: Number of SPAC IPOs and Gross Proceeds by Year
Why are SPACs once again gaining prominence?
SPACs have regained prominence for three key reasons. Firstly, with record high stock-market valuations and record low yields on debt, investors have been seeking more innovative measures for generating returns. Given the ability of investors to gain a risk-free yield via the SPAC trust and the potential upside a warrant offers, investing in a SPAC IPO can generate solid returns while maintaining a similar risk-profile to treasuries. Thus, in the current low-interest rate environment, SPACs have become more appealing.
In addition to this, the current high volatility in IPO markets plays to the strengths of SPACs. Over 2019 there were numerous weak listings across developed market stock exchanges, and a decline in the number of overall listings. Companies that are not confident in their ability to raise investor support independently can benefit from the reduced uncertainty when accessing the public markets via a SPAC acquisition, as SPACs making acquisitions will already be listed on stock exchanges. While, as mentioned, roadshows are often required to win approval for the transaction via the proxy vote, the target company now has the support and expertise of the SPAC to help.
Finally, SPACs have gained legitimacy in recent times due to more high-profile firms launching SPACs and involvement of high-quality executive teams. Companies including Goldman Sachs, Third Point and Hudson Bay Capital Management have launched SPACs since 2016. Management teams include Tom Farley, former CEO of NYSE, Michael Klein, former Citigroup investment banker, and Chamath Palihapitiya, former Facebook executive and co-founder. With the backing of these brands, SPACs appear less controversial for both companies looking to go public and investors.
Deals to Know About
16th January 2020. Far Point agreed to merge with Global Blue, a Swiss Payments provider, valuing the combined group at $2.6bn including debt.
16th September 2019. Vivint Smart Home agree to merge with Mosaic Acquisition Corp., valuing the combined group at $5.6bn.
9th July 2019. Virgin Galactic agree merger with Social Capital Hedosophia at an EV of $1.5bn.
Cumming, D., Hass, L. and Schweizer, D. (2014). The Fast Track IPO – Success Factors for Taking Firms Public with SPACs. Journal of Banking & Finance, 47, pp.198-213.
Kolb, J. and Tykvová, T. (2016). Going public via special purpose acquisition companies: Frogs do not turn into princes. Journal of Corporate Finance, 40, pp.80-96.
PwC. (2017). The rise of SPACs in the IPO market - Deals - PwC UK blogs. [online] Available at: https://pwc.blogs.com/deals/2018/02/the-rise-of-spacs-in-the-ipo-market.html [Accessed 15 Feb. 2020].
Sec.gov. (2005). USE OF FORM S-8, FORM 8-K, AND FORM 20-F BY SHELL COMPANIES. [online] Available at: https://www.sec.gov/rules/final/33-8587.pdf [Accessed 16 Feb. 2020].
Shiffman, B. (2009). Using a SPAC to Go Public. In: F. D. Lipman, ed., International and U.S. IPO Planning: A Business Strategy Guide. Hoboken, NJ: Wiley, pp.203-226.
SPAC Insider. (2020). SPAC IPO Transactions Statistics - by SPAC Insider. [online] Available at: https://spacinsider.com/stats/ [Accessed 17 Feb. 2020].