Special Purpose Acquisition Companies (also referred to as “blank cheque” or “shell” companies) are companies with no commercial operations, that are formed strictly to raise capital for the purpose of acquiring another company or listing on stock exchanges to attract potential investors for their ventures.
A company that’s already in operation can then merge with, or be acquired by, the SPAC and become a listed company itself, instead of executing its own traditional Initial Public Offering (IPO).
When a company plans to go public through a traditional IPO, the process can take a year or more to complete. By using a SPAC, it may be a lot quicker.
SPACs are created for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, re-organisation or similar business combination with one or more businesses.
How does the SPAC’s acquisition process work?
From the establishment of a SPAC, the company usually has 24 months to complete the entire acquisition process.
In this process, many steps are performed, but the main ones are:
If the SPAC does not complete a merger within this limited time frame, the SPAC liquidates and investments are returned to its public shareholders.
What happens to the SPAC after the merger announcement?
This last step of creating the listed successor company is referred to as a “de-SPAC” transaction.
After the SPAC completes a merger with a target company, the previously privately held company will become publicly listed. The stock ticker for the SPAC is changed to reflect the name of the acquired company and with this it will start trading on the selected exchange.
What are the main risks when investing in a SPAC?
A SPAC is a high-risk investment. SPACs have recently been very popular with investors around the world, however this investment carries risks due to several factors:
The SPAC may fail to identify a target company within the required time period (typically 24 months) and have to return funds to its investors, causing no return to be achieved over the period that the capital was invested.
Increasing competition in this space can drive SPACs to targeting companies at ever earlier development stages and so influence and drive-up investment risks, especially if they try to invest in ‘hot’ or newer sectors such as emerging technologies (eg: space exploration). Early-stage companies may have a short financial history and still be developing their internal controls. They may also be in early negotiations with their sponsors (founders) and be heavily based on forward-looking projections. Targets will need to be able to withstand the rigour and requirements that will apply once they become a public company.
Conflicts of Interests
Sponsors and directors of SPACs may have personal interests that compete with the best interests of public shareholders.
Investors must place a great deal of trust in the SPAC’s management team to find the best target company for a merger since some parties may be financially incentivised to ensure that the SPAC completes a merger within the limited time available.
IPO versus SPAC merger
In contrast to an IPO, in the SPAC’s merger process there is no underwriter so the comprehensive due diligence which is usually associated with a company going public may not be carried out.
SPAC sponsors have a strictly limited time to close a deal, which could influence the effectiveness of their acquisition research, especially when it is not guaranteed that the sponsor or management team has continued involvement in the target company post-merger.
Because of this time constraint the SPAC founders may focus on their ability to close a transaction rather than the suitability of the target company going public.