Special Purpose Acquisition Company (SPAC)

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When we rang in 2020, it is safe to say none of us expected the year to have such turns and twists, that literally stopped the whole world in it’s tracks. And in the midst of all that chaos and worries, no one thought SPACs would become such a hot commodity;

What are SPACs?

These are often referred to as blank check companies, because they do not run any operations, but exist formally to raise capital through an IPO in order to purchase a targetted company. Having been around for quite some time now, the founders (Investors/ Sponsors) of SPACs are well versed in a certain Industry or sector, for which they target certain private companies operating in that industry, with intention of acquiring them.

Normally, they first seek Institutional Investors such as Insurance Companies, Pension Funds, Mutual Funds, Hedge Funds, Endowment Funds (fueled by charitable donations) and also Commercial Banks. Thereafter, shares are offered to the public for subscription.

The money raised is held in a trust account for a period not exceeding two (2) years, during which, SPAC sponsor works to finalize the acquisition deal with the target company. Upon approval by all shareholders, the now acquired company becomes a public company without going through the traditional IPO route. However, if shareholders evaluate the acquisition to be made, and are not happy with it, they have full authority to decline and stop the transaction from being finalize and demand for their money to be returned.

SPACs are known for being blank check companies, clean shell companies (unlike the ones who use reverse mergers) and some refer to them as blind pools.

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HONORARY MENTIONS

DiamondPeak Holdings Corp., a special purpose acquisition company has recently entered into a $1.6 billion merger with Lordstown Motors, an electric automaker based in Lordstown, Ohio. The merger will be key in financing the manufacturing of its all electric pickup truck, The Endurance. The deal is expected to close come fourth quarter of 2020.

The deal has been backed up names including General Motors (GM) with a sweet investment of $75 million and other Institutional Investors such as Wellington Management Company, Funds and Accounts overseen by BlackRock, Fidelity Management & Research Company and Federated Hermes Kaufmann Small Cap Fund.

Lordstown follow its peer Fiskler, which became a public traded company through a merger with Spartan Energy Acquisition Corp, a SPAC created for the sole purpose of entering into a merger.

Billy Beane, Oakland Athletics Executive, the man behind Brad Pitt’s character for Oscar Nominated movie “Money Ball” is teaming up with a Private Equity Firm RedBird Capital Partners to create a SPAC that will target companies in the Sports Industry. There is no question this will be exciting to watch this venture unfold, as currently there are no teams are available in the market and such acquisitions are lengthy to be executed in the two year life span of a SPAC. Which company do they have in mind, or better yet, which sports activity (ies) have deemed lucrative before them that they are willing to form a SPAC to invest in.

SPACs have become really popular on acquistion deals related to electric or alternative fuel vehicles and other Industries such as Fintech and Online Gambling, this fast track IPO process has also hit a home run. DraftKings, an online gambling and sports betting company, became a public company after merger with SBTech and Diamond Eagle Acquistion for a deal valued at $2.7 billion.

BUT?

Despite seeing successful SPACs, it is not always a guarantee that they will do well post merger, and some do not even get to execute the acquistion transaction deal due to limited time available (two years) or investors voting the target company out, prompting to redeem their shares.

Goldman Sachs analyzed 56 SPACs that completed their acquisitions in 2018, only to find that they tend to underperform in the long run as compared to the short run performance.

According to Bloomberg, $21 billion has so far been raised through 51 SPACs in 2020, contributing almost to a third of all US IPO proceeds, much of the frenzy has been attributed to the times we are living in now, how the coronavirus pandemic has affected many private companies, which in turn made them to seek easy access to finance so as to stay afloat, or seeking a quick exit.

As much as the boom is experienced in the West, Europe and Asia is yet to enjoy such traction. The capital markets in Europe are not as big compared to those in the US, and there exists a small number of sponsors who can raise that much of capital to finance such acquisitions. In Asia, IPO is still a favored exit or capital raising route compared to other methods. In Europe, particularly the UK, when SPACs deals close, they would use the structure applicable in the jurisdiction, but still end up listing in the US after the transaction is completed.

So are SPACs here to stay? Or are they just a wave that can’t pull the long run weight? With valuations of the companies being affected by the pandemic, this might seem like a lucrative way to attain funding, despite the time and longevity risk it poses. Will other markets adapt easily or is just one of US-only trend to collect more money from Investors? The most important strategy to figure out is how these acquisitions can survive post merger period, despite the small transitioning time available to them, in order to create sustainable returns for their investors.