SPAC( Special Purpose Acquisition Company)
SPACs (Special purpose acquisition company)
- an alternative to the traditional IPO
SPAC has gained traction from the last year with the number of blank cheque companies nearly doubled. The best thing about these corporations is that common people like you and me can launch a SPAC as well.
This has gained some recent scrutiny as well from big market players as well as financial regulators around the world.
So what is SPAC and why has it gained so much attention? Let's find out.
A spac is a corporation formed solely for the purpose of acquiring another company/companies, by raising funds through IPO( initial public offering). It is a special kind of shell company often called a blank check company as well. Well clearly the name blank check suits the purpose and the characteristics of the company as the collected funds are used to acquire one or more unspecified companies.
How does it work?
In a blank cheque companies promoters are the main selling points who are confident that their reputation and experience will entice investors to invest funds in their company. The investors know the purpose of raising the IPO( mandatory for a company under companies act, 2013) but it is still vague as the company to be acquired is unknown.
SPAC offers their IPO in the traditional way or through intermediaries often called red herring prospectus, usually the services are provided by investment banks for a set amount of fee. The promoters share in the raised capital is around 20% and the rest 80% funds are from institutional investors, retail investors etc.
Trust account
The funds collected through ipo are kept in a separate bank account called a trust account until the company is identified and acquired.
The time limit to identify and complete the acquisition of a private corporation is around 18- 24 months and the valuation of assets agreed between the acquirer and the acquiree must be at least 80% of the funds raised.
Why are companies merging with SPACs? What's the rush
The foremost reason for this boom in demand of SPACs is the volatility in the financial markets due to pandemic. When companies are less sure of gathering capital through public issues either because they have less control on the capital they can collect or because the traditional IPO is less enticing for them due to a number of regulations that need to be fulfilled in order to launch an IPO.
Apart from this some private companies prefer going public through SPACs because of speed, stability in the pricing of shares or even strategic partnerships with investors.
The frenzy about going public through SPAC is provided below-:
It shows recent companies that have gone public through SPACs, largest SPAC deals, total capital acquired by the companies through the same
These are some of the prominent acquisitions of 2020 which turned out to be a big success. For eg- quantumSpace was acquired by kensington capital acquisition and its shares jumped by 50% on the first day of going public or paya holdings whose share bounced 10% on the market debut.
Trends in SPAC
Blank cheque companies have become very popular in the recent past. There is 600% increase in the number of blank cheque companies from 2016- 2021 or in absolute terms from 28 companies in 2016 to more than 200 companies in 2021.
The graph shows the amount of capital raised by these blank cheque companies. With just $3.2 billion dollars raised in Q1 2019 to raising $82.8 billion dollars raised in Q1 2021 there is 27 fold increase in capital acquisition in 2 years. It is further clear that these special companies are not going anywhere in the near future.with the markets having more liquidity amid the recovery phase and trend of more and more companies going public. Hence, better laws and regulation are the need of the hour to protect both institutional and retail investors investing in these companies.
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