Things You Need to Know About SPACs
A special purpose acquisition company (SPAC) is also known as a “blank check company.” It is an entity that has no commercial operations and is meant to complete the initial public offering (IPO) procedures.
For companies and investors, there are several important aspects of SPACs that they should know about to ensure they are fully familiar with this important concept.
In this regard, professional accounting firms in Malaysia are also instrumental in helping companies form a SPAC.
Keep reading to learn all about SPACs.
What is a SPAC?
A Special Purpose Acquisition Company (SPAC) is a type of investment vehicle designed to take companies public without going through the traditional initial public offering (IPO) process. SPACs, also known as “blank check companies,” have no commercial operations and are formed solely to raise capital through an IPO to acquire an existing company.
How Do SPACs Work?
1. Formation and IPO:
Formation
A SPAC is created by a group of investors, often with expertise in a particular industry or sector.
IPO
The SPAC goes public, raising funds from investors. The money raised is placed in a trust account until a target company is found.
2. Searching for a Target
The SPAC has a set timeframe, usually 18-24 months, to identify and merge with a target company. If no acquisition is made, the SPAC is liquidated, and funds are returned to investors.
3. Acquisition and Merger
Once a target is identified, the SPAC and the target company negotiate terms. Upon agreement, the target company merges with the SPAC and becomes a publicly traded entity.
SPAC Growth Over Years
Data Source: HBR Article
Special purpose acquisition companies (SPACs) have seen a dramatic increase in activity over the past few years. This growth is reflected in both the number of SPACs created and the amount of capital invested.
- 2019: In 2019, the SPAC market was relatively modest, with 59 SPACs created and $13 billion invested. This year marked the beginning of an upward trend in SPAC activity.
- 2020: The year 2020 witnessed an explosion in the SPAC market. The number of SPACs created surged to 247, with a total investment of $80 billion. This significant increase can be attributed to a growing interest in alternative investment vehicles and a favorable economic environment for raising capital.
- 2021 Q1: The momentum continued into the first quarter of 2021. In just the first three months, 295 SPACs were created, raising $96 billion. This rapid growth indicates that SPACs have become a mainstream method for companies to go public, driven by the speed and flexibility they offer compared to traditional IPOs.
SPACs vs. Traditional IPOs
Higher Valuations
SPACs often offer target companies higher valuations than they might receive through a traditional IPO.
Speed to Market
The process of going public via a SPAC is generally faster, sometimes taking just a few months compared to the lengthy and complex traditional IPO process.
Lower Costs
SPACs typically involve lower underwriting fees and fewer regulatory requirements, making them a more cost-effective option for companies.
Goals of SPACs
The primary purpose of a SPAC is to bring a private company into the public market. Implementation of SPAC strategies can be quite difficult, but they take less time than traditional IPO listing.
Moreover, taking a company public via SPAC is cheaper compared with a traditional IPO because it involves lower advisory charges. Organizations that are in their early stages can easily fulfill the requirements to merge with a SPAC and complete the IPO process.
Benefits of SPACs
Faster Process
The timeline for taking a company public via a SPAC is often shorter than a traditional IPO.
Reduced Costs
SPACs can offer a more cost-effective route to going public.
Experienced Sponsors
SPACs are typically led by seasoned executives and industry experts, which can provide credibility and strategic advantages.
Risks and Considerations of SPACs
Uncertain Outcome
Investors in a SPAC are essentially betting on the ability of the SPAC’s management to find and acquire a successful target.
Dilution
SPAC founders typically receive a substantial percentage of shares, which can dilute the value for other investors.
Market Conditions
The success of a SPAC can be heavily influenced by market conditions at the time of the acquisition.
What Happens in a SPAC Merger?
The process of forming a SPAC starts by raising capital on a stock exchange. Generally, the common stock is priced at $10, and warrants are offered to purchase additional shares to attract investors.
A trust account is used to hold the initial sale of stock until a suitable merger partner is found to complete the IPO process.
The team behind the SPAC is responsible for identifying and negotiating a suitable business structure with a private entity to get the desired results. This process can become smooth and easy with the help of an accounting firm in Malaysia.
Once the investors are familiar with the target company, the initial share price of $10 changes, and the deal terms are decided accordingly. The share price can keep adjusting according to the developing situation.
Generally, SPAC share prices will see huge growth after the announcement of the acquisition target. However, if the sentiment toward going public turns negative, the SPAC’s share price can decline as well.
The announcement of the merger is followed by a “de-SPAC” transition period. There is typically a certain time period between the formal merger announcement and the close of the deal when investors decide the overall terms and handle legal matters.
Once a deal is announced, the de-SPAC transition begins. There is usually a time between a formal merger announcement and the close of a deal (when investors vote on the deal), and other legal matters are resolved.
Once a SPAC has raised money, it has about 18 to 24 months to identify and find a suitable merger partner. Companies that encounter difficulty in finding the best partner can rely on experts like a professional accounting firm in Malaysia for the best recommendation and outcome.
Why Would Someone Invest in a SPAC?
It is common for investors to buy into SPAC before the announcement of a merger solely because of the trust they have for the SPAC’s management team and its ability to find a suitable target.
Therefore, it is important to note that many SPACs are backed by large-scale investors, celebrities, and popular athletes.
The share prices of SPACs were stable before the merger. The ideal practice is that SPAC invests all of the money it raises into government bonds or other safe forms of investments.
It is useful for investors as they get to make a modest return and minimize the risks of financial loss while they look for the perfect merger partner.
Buying shares in an emerging SPAC can be a leap of faith, but the profits can be massive in both the short and long term. It is possible for the share price to change immediately after the deal announcement. In such a situation, investors can greatly benefit from rapid price increases.
Recent Trends of SPACs
SPACs have gained popularity in recent years, with a significant increase in both the number of SPACs formed and the amount of capital raised. High-profile mergers and successful public listings have driven interest and investment in this vehicle.
Conclusion
SPAC is not the traditional method of taking a company public and making money. However, it is a popular alternative to the conventionally lengthy and difficult IPO process. Moreover, it can give great financial benefits to investors and acquisition targets when the best SPAC merger practices are implemented.
In order to make this process smooth and successful, it is highly recommended that companies rely on a professional accounting firm in Malaysia to ensure the experts are there to handle such important matters in the best way possible.
