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Embracing the SPAC-tacular trend
What are Special Purpose Acquisition Companies (SPACs)?
A special purpose acquisition company (SPAC) is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO). Commonly known as “blank-check company”, a SPAC has no prior operating history, is not a operating or revenue generating business or asset at the point of IPO. Such business structures allow investors to contribute money towards a fund to acquire one or more unspecified businesses in accordance with the business strategy or acquisition mandate set out in the IPO prospectus. Funds raised from a SPAC IPO are held in trust for a predetermined period of time until an acquisition of a private business is made, known as a de-SPAC transaction or SPAC merger.
The investors behind the SPAC, referred to as sponsors, are experts in management and deal advisory and may include corporate entities. Investors are given the right to vote for or against the acquisition, and may redeem their shares if they vote against it. At the expiry of the predetermined period before any acquisition is made, the SPAC is liquidated with all funds returned to the founders and IPO investors. Following a successful SPAC merger, the sellers of the target business may receive cash, equity in the SPAC, or a combination. In many cases, the sellers of the target business will retain some ownership in the merged entity. The post-merger combined entity moves forward as a publicly traded company.
Recent Developments for SPACs
The recent years saw SPAC’s resurgence in popularity attributable to low interest rates, abundant liquidity in the US market and increasing number of acquisition targets, especially in the tech space. The year 2020 registered more SPAC IPOs compared to previous years combined with 248 SPAC IPOs. The US (Nasdaq Stock Market and New York Stock Exchange) currently account for the majority of the listing of SPACs, with several other stock exchanges.
US stock exchanges registered 350 SPAC IPOs with total funds raised close to USD100 billion in the first half of 2021. This surpasses the USD83.4 billion raised throughout 2020, mainly due to the top 4 SPACs raising funds in excess of USD1 billion each. Even though traditional IPOs still dominate over SPAC IPOs in terms of volume and total funds raised, the average size of SPAC IPOs came close to a traditional IPO size at USD300 million level in 2020 and first quarter of 2021.
In April this year, Grab Holdings announced its USD40 billion merger with a publicly-listed shell company backed by Altimeter Capital, marking the biggest ever deal with a blank cheque firm. Others that are possibly aiming for a SPAC listing in US include Singapore’s online real estate firm; PropertyGuru, e-commerce platform; Carousal,mixed martial arts firm; One Championship and Indonesian online travel booking platform; Traveloka. SPACs have garnered much appeal for the reasons stated below:
Shorter timeline to list: Traditional IPOs typically require 12 months or more to complete. For a SPAC merger, the target business can be listed in three to five months, assuming it has a stable financial controls system and a proper corporate governance structure. Hence, this may translate into a lower cost involved, given the shorter planning and execution timeframe.
Certainty of valuation and funds raised: Traditional IPOs are dependent on the book building process. However, valuation and funds raised through the SPAC business combination will be privately agreed between the management team of the SPAC and the target company.
Quality sponsors and management team: The target company can benefit from the experienced leadership and/or strategic guidance of the sponsors and appointed management team, after going public.
Failure to complete de-SPAC transaction : SPACs may not be able to identify a suitable target company or successfully consummate the business combination within the pre-determined time frame. Even after extensive due diligence and negotiations, the transaction might eventually be rejected by shareholders. This may result in the liquidation of the SPAC.
Poor quality of target companies: There is an inherent uncertainty to the target company. In the course of rushing to complete a business combination, sponsors may compromise on the quality of targets and standards of due diligence, especially in a market where SPACs are chasing after targets. This may be aggravated by the fact that the de-SPAC target is not subject to the same level of review and scrutiny as that of a listing applicant under the traditional IPO route.
Conclusion
The SPAC phenomenon is expected to remain, given its benefits when comparing with a traditional IPO. The SPAC merger process with a target company may be completed in as little as three to five months, which is substantially shorter than a typical traditional IPO timeline.
For more information please contact:
Grace Lui, Director, Valuation & Transaction Services
Nexia TS, Singapore
T: (65) 6597 7297
E:gracelui@nexiats.com.sg
W: www.nexiats.com.sg
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