What exactly are SPACs?
SPACs are special purpose acquisition companies, which can also be referred to as shell companies. SPACs raise money from investors through stock-market listings. The SPAC, by itself, does not have any core business. The very business of SPAC is to float a company in the US with the sole purpose of subsequently acquiring private companies to merge with the SPAC and help them to go public in complex IPO markets like the US.
SPACs don’t involve public presentations, roadshows etc. It is a closed-room deal between the SPAC, target company and large investors. Generally, SPAC is floated by experienced management teams with deep expertise in an industry. The founder retains about 20% stake in the SPAC with the balance 80% shares held by public shareholders via units offered in an IPO of SPAC’s shares. In a SPAC, founder shares and public shares have similar voting rights; with founder shares have the special right to elect SPAC directors.
SPAC deals are picking up and here is how
SPAC deals have been in existence since the 1990s, but have taken off recently. In 2016, total SPAC deals were $5 billion and it was just $10 billion in 2017 and 2018. However, the value of SPAC deal shot up to $82 billion in 2020. In 2021 SPAC deals worth $46 billion were closed out in 2 months. In terms of number of deals, 2021 looks to break all records.
Experienced management teams prefer the SPAC route to take companies public. There are lesser regulatory hassles and is a lot quicker than a traditional IPOs. All that is needed is the SPAC acquiring the target company resulting in an automatic listing in the US markets. Once the target company merges with the publicly traded SPAC, it automatically becomes a listed company in the US markets without going through the elaborate IPO process.
What are the steps for listing a company through the SPAC route?
Typically, when a SPAC is formed, it either has a target company in mind or has a theme for investment crystallized. Based on the investment themes of SPAC, prospective companies can approach the SPAC or the SPAC approaches IPO prospects. The SPAC is under pressure to acquire targets as the proceeds of its IPO are placed in a trust account for 18-24 months. If the SPAC does not complete the merger by then, the SPAC is liquidated and capital returned to investors. That is why SPACs are in a hurry to complete the merger process.
- Once the target company is identified a merger is announced. Subsequent to the announcement, the SPAC seeks approval of its shareholders for the merger.
- If shareholder rejects the merger, then that plan has to be shelved. Shareholders can vote against the transaction and also opt to redeem their shares.
- Once the merger is approved, and if the SPAC needs additional funds to complete the merger, such funds are raised via debt or equity.
- If the SPAC intends to register new securities as part of the merger, then it needs to file proxy statement in Form S-4.
- Once all formalities are completed, the target company becomes a public entity. Within 4 business days, Form Super 8-K has to be filed with SEC to complete the process.
Big names are lining up for SPAC listing
It is not just smaller companies opting for a SPAC listing. Scores of reputed names are also taking the SPAC route. WeWork, whose IPO failed in 2019, may adopt the SPAC route. There are names like Virgin Galactic, DraftKings, Opendoor and Nikola Motor that have gone public by merging with SPACs. There are interesting names lined up for SPAC listing. Butterfly Network backed by Bill Gates, DNA start-up 23andMe and Buzzfeed are all looking at the SPAC route for listing. Of course, from India, Flipkart and ReNew, and perhaps even Grofers, could be SPAC candidates.
Of course, there are critics too
One criticism of the SPAC route is that the due diligence process is not as rigorous as traditional IPOs. Also, there is a likelihood that the merger with the target could be rejected and that could pose a roadblock for a proposed listing. Experts have also pointed out that SPACs may overpay for a target company just to meet its timeline. In terms of returns, SPAC returns have lagged IPO returns between 2015 and 2020. But, these are early days and what cannot be refuted is that SPACs surely offer a simpler listing solution.