2020 was a banner year for SPAC deals. A whopping 248 SPACs were listed in the US last year. To put things in perspective, there were only 59 SPAC listings in all of 2019. Organizations with buzzing themes like space travel, electric vehicles, and cannabis, preferred to bypass the cumbersome and expensive traditional IPO route and opted for SPACs to go public. A company vying to get listed through a SPAC typically saves 3-6 months and 0.5% to 1% in underwriting fee in comparison to a traditional IPO. Although a SPAC listing comes with a lot of risks (investments are made only based on the SPAC sponsor’s track record and the SPACs investment thesis), there is no one stopping this SPAC juggernaut as more and more companies are joining the SPAC bandwagon in 2021. As I write this, a total of 298 SPAC IPOs were listed so far in 2021, mopping up a total of $97 Billion from investors.
So, what is a SPAC?
Before getting into details, first things first. Here’s a super short explainer on SPAC: A special purpose acquisition company (SPAC) is a blank cheque company with no real assets or commercial operations, solely formed to raise capital from investors. Once the capital is raised, the SPAC will get listed in the market and start trading like a regular stock. Now the SPAC sponsors (Usually veteran investors/Money managers) will start prospecting private companies to acquire and take them public. The sponsors evaluate multiple target companies, start negotiations, arrive at a valuation, get approval from the investors and complete the private company’s acquisition and take it public. If the SPAC investors don’t approve the agreement, the sponsors dissolve the entire process and start seeking out other targets. If the sponsors aren’t able to find an appropriate company to acquire before the deadline, the SPAC gets winded up and the investors get their money back.
Why have SPACs become very popular?
SPACs have been around here for a while. The first SPAC was created way back in 1993. After All, they are a form of reverse mergers, (taking private company public without any paperwork) which is very common among M&A practitioners. But why have they become so mainstream lately and what is the reason behind the astronomical rise in the number of SPAC deals? Firstly the SEC has regulated various aspects of reverse mergers and made SPAC a worthwhile investment vehicle. Secondly, the demand and supply dynamics as the number of listed companies has come down substantially in the last two decades in the US. At the same time, the capital flowing into the US equities has been rising. With surplus liquidity available in the system currently, it has triggered investors to look out for new high-yielding investment avenues. Star investors like Bill Ackman of Pershing Square Capital and former Facebook executive Chamath Palihapitiya came up with multi-bagger SPAC acquisitions making SPACs even more alluring for the investors. At the same time, private companies started finding SPACs a very easy way to go public avoiding all the lengthy processes associated with a regular IPO. Additionally, retail investors now have the access to invest in private businesses which wasn’t a common thing before. So a win-win for all!
The role of M&A platforms in SPAC transactions
Currently, there are a total of 432 SPACs that are seeking acquisitions in the US and this number will only grow going forward. It’s of utmost importance for a SPAC sponsor to identify the right target. This article from Harvard Business Review claims the sudden surge in the number of SPACs as a bubble that will burst soon as the sponsors will find it very difficult to maintain quality within their acquisitions. The question here is how SPAC sponsors afford to stay on top of their game to make meaningful acquisitions. The answer for this could be an M&A platform that can aid M&A teams to efficiently plan and execute a deal. Starting from prospecting a new target, through due diligence, integration, and post-merger tracking, an M&A platform provides end-to-end support to corporate M&A teams and helps M&A practitioners make better decisions. While this is the case with the sponsors, a target company looking to go public via a SPAC can make use of an M&A platform, as it will help them plan their M&A deal in a much more organized manner, providing a safe and secure platform to communicate with the stakeholders.
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Author: Harsavardhan Jeyakumar