SPACs v IPOs

Usually, when you hear about companies going public -getting listed on the stock market and selling shares to investors- it is by means of Initial Public Offering (IPOs). So, while IPOs are the most common way, they are not the only way by which a company can offer its shares for sale to the public.

Enter SPACs. 

(Fun fact: SPACs are picking up steam in 2020)

Before going further, it is important to state here that there are actually four ways for a private company to go public: The traditional IPO process, Direct listing, SPACs and Reverse Takeover.

In this article, we’ll focus on the SPAC.

SPACs, which stand for Special Purpose Acquisition Companies, are publicly traded companies that exist to raise capital from investors to acquire a private company. This is the only business of SPACs; they do not have any commercial or business operations. Since the SPAC is a public company, the private company also becomes public as well, through the merger/acquisition. Think of it as a marriage of convenience.

On the other hand, an IPO, which is the more popular option, does not require the private company to merge with or be acquired by any other company. The company initiates and carries out the whole process of going public by itself.

Let’s just go back to talking about SPACs

How do they work?

First of all, a SPAC is formed by investors or sponsors, as a  shell company with the intention of identifying and purchasing businesses in a particular field or in different fields. The SPAC then goes through the IPO process, offering shares to investors. The money raised from the IPO process is placed in a trust account while the SPAC seeks out a suitable candidate that it can either acquire or merge with.

If the SPAC finds the right company then the two will merge. The ticker symbol of the SPAC will be changed to reflect the acquired company or the newly merged company. A SPAC generally has two years to complete a deal or face liquidation; the SPAC will have to fold up and return all the money it raised to the investors.

Is it a new trend?

No, it’s not a new thing. SPACs have been around for a while but the use of SPACs declined greatly following the market meltdown in 2008.  In recent years though, an excess of capital has led investors to seek out M&A’s more aggressively and that’s led to the return of SPACs. More SPACs went public in 2018 than in any year since 2007, and in 2019 the IPO fundraising for SPACS hit a record $13.6 billion – more than four times the $3.2 billion they raised in 2016. 

A few examples of SPAC deals

• In 2019, venture capitalist Chamath Palihapitiya’s SPAC, Social Capital Hedosophia Holdings (NYSE: IPOB), bought a 49% stake in Virgin Galactic (NYSE: SPCE) for $800 million before listing the company. This is one of the most high-profile recent deals involving SPACs.
• In 2020, Bill Ackman, founder of Pershing Square Capital Management, sponsored his own SPAC, Pershing Square Tontine Holdings (NYSE: PSTH), the largest-ever SPAC, raising $4 billion in its offering.
• Nikola Corporation (NASDAQ: NKLA) and DraftKings (NASDAQ: DKNG) also went public through SPACs.

Why SPACs?

For many private companies, being acquired by a SPAC offers a faster IPO process, devoid of all the extensive issues that the company would otherwise face if it decided on a normal IPO. With a SPAC, a private company can cash in on the hype or buzz around it and quickly turn into a public company offering shares on the stock market.

Once the SPAC is in place, the process for the merger is simpler than it would be to file a full set of IPO paperwork with the Securities and Exchange Commission (SEC). It’s a trade-off that seems worthwhile.

It is for this reason that many make a case for SPACs as against the traditional IPO. IPOs are generally time-consuming because of all the high standards and processes involved, while the standards for SPACs are considerably lower, making it a faster alternative.

So, any time there’s a well-hyped trend on the market or the possibility of one, a SPAC is usually touted as the right vehicle for a quick IPO. The companies that go public via SPACs are not usually the ones that planned an IPO for a long time but the ones that suddenly had an opportunity and really wanted to take it.

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