2023.02.14 2023.02.14
What Is SPAC (Special Purpose Acquisition Company)?Jana Kanehttps://www.litefinance.org/blog/authors/jana-kane/
Don Butler of Thomvest Ventures gives the following SPAC definition: “You can think of it like this: an IPO is basically a company looking for money, while a SPAC is money looking for a company”. So, what is SPAC, and how is it connected with an IPO? Let’s dive into details and see the advantages and disadvantages of SPAC companies, whether a SPAC investment is a good choice, and which SPAC stocks are performing the best right now.
The article covers the following subjects:
What Is a SPAC and How Does a SPAC Work?
A SPAC (special purpose acquisition company) is a company aiming not to conduct business operations but to raise money with the help of an initial public offering (or IPO). SPAC intends to make an acquisition or proposed merger with another company after having conducted due diligence.
The history of SPACs (aka blank checks) goes back to the 1990s when small companies were thinking of ways to avoid traditional IPO processes and go public to offer their shares for SPAC’s public shareholders. Right now, the popularity of SPACs is on the rise. According to Deal Point market data, in 2020, 247 SPACs raised more than $75 billion. Based on Harvard Business Review “SPACS: What you need to know”, 295 SPACs have raised more than $96 billion in the first quarter of 2021.
So, when a company wants to go from a private company to a public company, it has two options — to apply to IPO or to find a SPAC if it’s not big enough to participate in an IPO. When a SPAC deals with an IPO, it remains a shell company that begins looking for another company with which to merge. There is a timeframe of up to two years. If the SPAC doesn’t find a company, the money is given back to regular investors. According to the SPAC financial statements and rules (regulated by the securities and exchange commission), until a target company is found, all the money raised is stored in an Interest Bearing Trust Account (IBTA). The funds are held in trust account until the SPAC completes an acquisition or SPAC merger. If the acquisition or merger does not occur within a specified period of time, the funds in the IBTA may be returned to the investors. The value of the shares and warrants should trade as close as possible to their launch price, but it can change due to market volatility and if SPAC shareholders strongly believe they have found attractive acquisition target companies.
Once the target company is found, the SPAC shareholders give their permission to start the de-SPAC process. During this process, the shell company and the private equity firms are merged, and the newly acquired target company gets the ability to trade under its name.
Successful SPAC Acquisitions
In 2019, there were plenty of successful SPACs. All of them started as small companies, but with the help of blank check companies and early investors, they managed to enter the public equity market. Here are some of them:
1. Adapthealth
Adapthealth specializes in various types of healthcare equipment, from walkers and sanitizing machines to diabetes, sleep apnea tools, and oxygen equipment. Every year more than 800,000 patients are treated with the help of the company’s products. In 2021, the company revenue was estimated at more than $2 billion.
2. Betterware de Mexico
It is one of the leading direct-to-customer companies in Mexico. It produces kitchenware and other things for the home. A share in Betterware de Mexico initially cost $6.70. At the time of the valuation at the end of 2021, the price had climbed to $49.
3. Draftkings
Draftkings is an iGaming company. In April 2020, it completed its reverse SPAC merger, and its stock prices were at $21. A year later, the price rose to $74.38.
Advantages and Disadvantages of SPACs
SPACs’ finance solutions haven’t lost their popularity since they peaked in 2020. Therefore, more and more potential investors show their interest in SPAC opportunities. However, a SPAC stock issue is rather controversial as, alongside the upsides, there are some downsides and risks for investors to consider. Skepticism by some people is understandable.
Pros and Cons for Investors
Pros
Cons
A guarantee that investors receive their money back if the SPAC fails or you don’t like the company to be merged with.
The capital shortfall from potential redemption.
An opportunity to own a larger stake: an institutional investor can buy more shares after the acquisition via warrants.
SPAC investors never know what company a SPAC will choose to acquire. It’s impossible to predetermine whether your investment will bring a significant benefit.
SPACs are open not only to institutional investors but also to retail investors who can’t participate in a traditional IPO.
Retail investors don’t get warrants; they won’t get their money back if they don’t like the SPAC merger.
Pros and Cons for Sponsors
Pros
Cons
A 20% stake in the SPAC.
Shareholding dilution.
The SPAC IPO process is easier than the traditional IPO process.
If the supply (number of SPACs) exceeds demand (number of companies to be acquired), the SPAC will fail.
Via a SPAC merger process, SPAC sponsors can invest in later-stage private equity to build up a good strategy after the IPO proceeds.
No need to go through a roadshow.
Pros and Cons for Private Companies
Pros
Cons
To get access to a traditional IPO.
Increased expenses. SPAC investors pay 20% of the shares before the SPAC merger. It causes an expensive loss of equity for the company.
A SPAC merger is negotiated at a fair value.
It’s vital to be attractive enough for a SPAC to want to choose it as an acquisition target.
With a private company investors get a chance to trade at stock exchanges (for example at New York stock exchange) receiving a good amount of money for shares.
Faster than traditional IPO route (5-6 months against 12-24 months for an IPO).
Reduced regulatory burden for many investors.
Why SPACs Have Become So Popular
The amount of money that investors can earn with the help of SPACs is increasing. Even some big-name companies choose SPACs over IPOs. There are some pretty good reasons why SPACs have become popular:
Liquidity. A SPAC stock can be sold quickly via the open public market.
Access to private investment. An already publicly traded SPAC stock is open not only to institutional investors but also to retail investors. This guarantees access to new investments and thus requires more investment management.
Cost reduction. SPACs incur fewer expenses for investors than IPOs.
Speed. An IPO takes twice (or sometimes three or four times) as long.
Catches in-betweeners. Huge companies prefer getting venture capital funding; the small ones are usually uncertain about going public themselves. The SPAC market gives them a wonderful opportunity to do so.
How to Invest in a SPAC Stock
There are different types of investment management in special purpose acquisition companies. Each of them has its own particulars to which you should pay attention.
Individual Securities
SPAC stocks are easy to buy via an online brokerage account. Individual SPAC IPOs may be offered in units. In this case, there will be a letter “U” at the end of the ticker symbol. Buying a unit means buying one share of common stock and one share of a SPAC warrant.
Using this warrant, investors can buy an extra share of a stock a little bit later. The first thing they have to think about is the number of units of a SPAC they are interested in buying.
Another important aspect of investing in SPACs is planning the duration for holding the shares. As it was mentioned above, SPACs have a two-year period when an acquisition must be announced. So it’s possible that the money you invest could lie fallow for an extended period. It’s a good idea to think how much of your portfolio you would like to have committed to SPACs stocks.
SPAC ETFs
ETF stands for an exchange-traded fund. This type of security tracks an index, sector, commodity, or other assets. Investors can buy or sell an ETF on a stock exchange the same way a regular stock can.
SPACs also have ETFs. Investing in them is the same as investing in any other ETF. However, when it comes to SPACs, you have to clearly understand what the ETF contains and how big the share of the companies which have already gone through the reverse merger is. It is also useful to note the number of individual SPACs the ETF holds and the market sectors it represents. Keep in mind that SPACs ETFs may be more expensive than other types of ETFs.
How to Analyze a SPAC
So, how do you find out that a certain SPAC is a good choice for investment? Here are several tips that may help you.
Only buy special purpose acquisition companies with declared merger deals. Unfortunately, only a half of SPACs get target companies due to big competition for a promising private company. Sponsors can also influence how the deal goes. They have a chance to own a company without putting any money down. SPAC formation is easy, make it a public company, and then make a reverse merger. So, sponsors can have a 3 to 5% stake without investing anything.
Analyze the transactions detail page on the SPAC PowerPoint deck. The deck is issued with the original press release explaining why the company’s management team wishes to go public and why it is a good deal. Pay attention to the number of shares set to be outstanding after the merger. The SPAC shares and warrants will be converted partially or fully as soon as the reverse merge occurs.
Compare the market value of the deal with the SPAC comps in the slide deck. Many companies tend to rule out IPOs because the SEC (security exchange commission) simply does not allow them to forecast their projected financial statements including revenue and earnings. However, this factor is crucial. What is the point of investing in a company that has a blurred future? As SPACs merging with companies doesn’t constitute an IPO, the private company’s experienced management team can forecast its revenue and earnings, so look at these details closely.
Examples of SPACs
Here is a SPAC company list with the most incredible examples, with companies that raised a considerable amount of money.
7GC is a boutique venture capital fund focused on technologies. Its partner is a serial SPAC issuer named Hennessy Capital Investment. Together they have successfully rolled out five blank check companies (another definition of SPACs).
The SPAC funded capital of over $550 mln. Unlike others on this SPAC companies list, Bridgetown is headquartered in Hong Kong. Right now, Bridgetown is aiming to widen its agreement to Asia-Pacific and to create a new one with Traveloka. This Southeast Asian online travel firm formed a $40 billion super app for the local market.
The company management team succeeded to raise $345 million. The enterprise value is $1.1 billion. The main sphere of the business is robotics technology which can improve efficiency and lower the cost of surgeries for the wellbeing of patients.
Best SPACs to Invest in Right Now
There are six SPAC stocks that may catch the attention of investors.
1. Liberty Media Acquisition Corporation
The company was founded in 2020 in Colorado. The corporation’s sole purpose is to purchase stocks, acquire assets, affect SPAC deals, or establish a new form of organization. It is ready to form a business combination. The target company is being searched for in the media, telecommunications, and technology industries.It has raised $575 million in its Initial Public Offering on the Nasdaq Stock Exchange in January 2021. The price per unit was $10.
2. KKR Acquisition Holdings I Corp.
The corporation was formed in 2021 in New York. The company does not want to limit itself to a particular industry, but it’s looking for another target company in the consumer or retail industries. It had already raised $1.2 billion. Its 120 million units were sold at $10 each.
3. Rocket Internet Growth Opportunities Corp.
It was founded in 2021 in Grand Cayman Island. The target company should have been from the tech sector. The corporation has raised $250 mln. Each unit consisted of one common share and one-fourth of a warrant, exercisable at $11.50.
4. Waldencast Acquisition Corp.
The target company sphere is beauty, personal care, and wellness. It was formed in 2020 in White Plains, New York. $678 million was raised. Each company unit consists of one share of common stock and one-third of a warrant, exercisable at $11.50.
5. Elliott Opportunity II Corp.
The corporation aims at the technology sector. It was founded in 2021 in Florida. The company is offering 53 mln units at $10 each.
6. Orion Biotech Opportunities Corp.
The corporation was founded in 2021 in New York. Right now, the company possesses 20 mln units at $10 each.
Key Takeaways
SPACs are formed for raising money through an IPO to buy another company.
A small company can’t become publicly traded on its own. SPACs give it this possibility to have a publicly listed stock available on an exchange.
The IPO traditional process with a blank check company is easier as SPACs don’t hold a roadshow. Moreover, financial statements’ requirements are less burdensome.
SPACs have no current business deals or may not even have acquisition targets while having IPOs.
SPACs are available for small companies that can’t go public via IPOs.
SPACs’ popularity among investors is currently on the rise.
SPACs are safer for investors as they are guaranteed to get their money back if the SPAC is liquidated or an investor doesn’t like the merging with a SPAC.
SPACs have two years to complete an acquisition, or they must return their funds to retail or institutional investors.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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