A Special Purpose Acquisition Company or SPAC is a company solely formed with the goal of raising capital through an Initial Public Offering (IPO) and later use the capital raised to acquire and merge with an existing private company. These type of companies do not have any commercial operations of their own and are also known as “blank check companies”.
The founders of a SPAC company are generally experts in some or other industry and have a deep understanding of business. As these are a type of Shell Company the management is the key selling point for raising capital for these companies. SPAC may contact an investment bank to handle the IPO where the valuation focuses on the management’s history since there is no performance history of the company. The capital structure may include retail investors, institutional investors as well as founders share. Once the money is raised all the fund proceeds are held in an interest bearing trust account until the company identifies an acquisition target. There are two possibilities from here – first being that the management team finds and completes the acquisition within a specified time period (usually 18 to 24 months) or if no acquisition is made before the predetermined date, the SPAC is dissolved and the proceeds from the IPO are returned to the respective investors. In case the management needs additional funds for acquisition they may arrange for committed debt or equity financing, such as private investment in public equity. After this if the business combination is approved by the shareholders (not necessary) and the conditions specified in the acquisition agreement are satisfied, the SPAC and the target business will combine into a publically traded operating company. Here the ticker of the SPAC is changed on the exchange after the merger.
Comparison with the traditional IPO process
Technically the only business of a SPAC company is to acquire a private company and help them to go public. So the question raises that why would companies go via this path when they can opt for going through an IPO process themselves. Well there are various reasons why companies may opt for this process. Traditional IPO is a very extensive process which involves a lot of back and forth between the legal authorities, regulators and public authorities. This takes time and may hamper the firm’s objective of raising capital smoothly and efficiently. Private companies also go through a lot of public scrutiny while going through the IPO process and involves a lot of roadshows trying to get the investors interested in the company. Thus need to generate demand for the shares of the company for a successful IPO. This all involves a lot of uncertainty and companies like WeWork and Uber found this the hard way. Comparing this to SPAC, the IPO is already been done and it removes the financial uncertainties of IPO failures as well. Going through this process also reduces the time for the company to go public and reduces the public and regulators’ scrutiny. While it has benefits there are downsides to going public through SPAC as well. The investors who raised the capital may or may not be interested in the company after the acquisition and thus very difficult to get long term investors on-board. Secondly multiple sources have mentioned that SPAC is generally more expensive as compared to an IPO. The cost can go as high as three to four times you pay for an IPO and additional to this the founders might also get 20 percent of shares of the target company at a very cheap rate as compared to the price charged to the investors. Though with increased competition the underwriter fees has come down significantly in recent times. Further the amount of due diligence done on the target company is significantly less than what the Securities and Exchange Commission (in case of US) mandates for a regular IPO making investors wary about investing in such stocks.
Rise of SPAC
SPACs or similar entities have existed since decades now. In the 1990s these companies focused on technology and healthcare industry while it gained popularity in the oil and gas industry in the mid-2010s when the low commodity prices drove investors to management teams with experience on finding good mineral based companies. The number of SPAC IPOs and the capital raised via them has steadily increased since 2013 and 2020 has seen a sharp rise in SPAC IPOs.
Future of SPAC in India and regulatory Issues
SPAC have emerged as a promising means to raise capital and can help in public funding in offshore markets as well. This might particularly suite the Indian start-ups where the retail investors still have shown a very conservative approach. These also do not depend primarily on the private investments which might decline or dry up in the future. Though this brings huge opportunity for new businesses, Indian laws also need to be able to facilitate overseas funding or through domestic SPAC IPOs.
Some of the Indian acquisitions by SPAC are –