Finshots! Do an article on SPACs?
Finshots! Will you cover SPACs?
Finshots! You have to talk about SPACs!!
Alright people!!! We get it. Companies are now ignoring the traditional IPO route and opting to go public via SPACs. Star investors like Chamath Palihapitiya are batting for SPACs. News media has been covering SPACs rather incessantly for the past few months. And we know it’s time we joined in on the bandwagon. So in today’s Finshots, we will finally cover SPACs and more.
SPACs are weird. You have a bunch of investors coming together to create a hollow entity with a simple promise. And it goes something like this — “We will create a new company. It’s not a regular company. It’s a Special Purpose Acquisition Company (SPAC). Once we incorporate it, we will take the SPAC public. We will do an IPO and investors will give us money in exchange for some level of ownership in the SPAC. What will this SPAC do you ask? Well, as the name suggests, the “purpose” here is to acquire and merge with some other company. It won’t be doing anything else, except this one thing. We will find a target company that is fully operational. This entity will also have a working business model and it will be looking for an IPO. So we will walk in, try to merge with this new company and we will use your money to achieve this objective. Now at this point, you, the shareholders of the SPAC will have an option. You can either accept the merger and receive shares of this new combined entity or if you want to call it quits, you can simply redeem your SPAC shares at the original price of the offering. So you’ll get your money back, no questions asked. In the event we are not able to find a target company, then we will dissolve the SPAC and return all the money to the shareholders. Also, we have two years to seal this deal. If we don’t it by then, 'money back' once again. So, are you in or are you out?”
But this is only one half of the promise made to the investors participating in the SPAC. What about the company that’s merging with the SPAC? What’s in it for them?
Well, here’s what the SPAC will tell them — “Listen, you’re a great company. You are looking to go public. You are looking to raise money from the people via an IPO. But you don’t need to do it the old fashioned way. Think about all the uncertainty involved in the deal. You have to make the announcement. Market yourself and hope and pray that investors subscribe to your promise. What if they underpay? What if they don’t want to buy a substantial stake in your company? What if they don’t take too kindly to you? And what about all the time spent working with the regulator. It can take 18 months minimum. And with a lockdown in place, you can’t even do a proper roadshow to influence these investors. But we have an alternative. We will make you an offer you can’t refuse. We will go public for you. It will take us less than three months. And once we complete our IPO, you can simply merge with us. We have a fixed pool of money. And we can negotiate a price mutually. You won’t have to wait for a bunch of investment banks to tell you what other investors should pay for your shares. We can do it together, sitting side by side. And if all goes well, we should be able to merge and go public in under six months. It’s the best deal you can get."
So in summary, SPACs help other companies IPO in a relatively short amount of time. And they eliminate some of the uncertainties involved in the process. At least that's what they claim. And for people sponsoring the SPAC i.e. the people responsible for taking the SPAC public and negotiating with target companies, this can be an avenue to make a lot of money. In one particular instance, a group of investors made more than $60Mn from a $25,000 investment. All they had to do was pay a nominal amount for a sizeable stake in the SPAC before marketing and taking it public.
Which leaves us with one final question? Why now? Why have they suddenly surged in popularity?
Well, we can’t say for sure. There are a bunch of companies right now that want to expedite the whole process of going public. There is also this theory that companies can’t market their IPO effectively in the midst of a lockdown. So the SPAC route might look appealing to this lot. But maybe the most compelling theory is that SPACs are being made attractive by a bunch of high profile investors. If you’re in the public sphere and you keep talking about this shiny new thing called SPACs, it’s bound to catch a lot of attention.
So yeah, SPACs are all the rage these days and we hope this explainer did a half-decent job of explaining these things.
Until next time...