Special-purpose acquisition company

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A special purpose acquisition company (SPAC; /spæk/), also known as a "blank check company" is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process.[1][2] According to the U.S. Securities and Exchange Commission (SEC), "A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified".[3] SPACs raised a record $82 billion in 2020,[4] a period sometimes referred to as the "blank check boom".[4][2][5][6]

Because a SPAC is registered with the SEC and is a publicly traded company, the general public can buy its shares before the merger or acquisition takes place. For this reason they've been referred to as the 'poor man's private equity funds.'[7]

Academic analysis shows the investor returns on SPACs post-merger are almost uniformly heavily negative (however, sponsors at the flotation of the SPAC can earn excess returns),[8] and their proliferation, usually around periods of economic bubbles, such as the everything bubble in 2020–2021, when the volume and quantity of capital raised by SPACs set new all-time records.[5]

Characteristics[edit]

Mechanics[edit]

SPACs generally trade as units and/or as separate common shares and warrants on the Nasdaq and New York Stock Exchange (as of 2008) once the public offering has been declared effective by the SEC, distinguishing the SPAC from a blank check company formed under SEC Rule 419.[9][citation needed] Commonly, units are denoted with the letter "u" (for unit)[10] appended to the ticker symbol of SPAC shares.

Trading liquidity of the SPAC's securities provide investors with a flexible exit strategy. In addition, the public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC's performance.

By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition.[11] A SPAC's trust account can only be used to fund a shareholder-approved business combination or to return capital to public shareholders at a charter extension or business combination approval meeting. Today, the percentage of gross proceeds held in trust pending consummation of a business combination has increased to 100% and more.[citation needed]

Each SPAC has its own liquidation window within which it must complete a merger or an acquisition. Otherwise it is forced to dissolve and return the assets in the trust to the public stockholders. In practice, SPAC sponsors often extend the life of a SPAC by making a contribution to the trust account to entice shareholders to vote in favor of a charter amendment that delays the liquidation date.

In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC's net assets at the time of acquisition. Previous SPAC structures required a positive shareholder vote by 80% of the SPAC's public shareholders for the transaction to be consummated.[12] However, current SPAC provisions do not require a shareholder vote for the transaction to be consummated unless as follows:

Type of transaction & Shareholder approved required
Purchase of assets No
Purchase of stock of target not involving a merger with the company No
Merger of target with a subsidiary of the company No
Merger of the company with a target Yes

Governance[edit]

To allow for stockholders of the SPAC to make an informed decision on whether they wish to approve the business combination, the company must make full disclosure to stockholders of the target business, including complete audited financials, and terms of the proposed business combination via an SEC merger proxy statement. All common share stockholders of the SPAC are granted voting rights at a shareholder meeting to approve or reject the proposed business combination. A number of SPACs have also been placed on the London Stock Exchange AIM exchange. These SPACs do not have the aforementioned voting thresholds.

Since the financial crisis, protections for common shareholders have been put in place allowing stockholders to vote in favor of a deal and still redeem their shares for a pro-rata share of the trust account. (This is significantly different from the blind pool - blank check companies of the 1980s, which were a form of limited partnership that did not specify what investment opportunities the company plans to pursue.) The assets of the trust are only released if a business combination is approved by the voting shareholders, or a business combination is not consummated within the amount of time allowed by a company's articles of incorporation.

Management[edit]

The SPAC is usually led by an experienced management team composed of three or more members with prior private equity, mergers and acquisitions, and/or operating experience. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually held in escrow for 2–3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to between 2% to 8% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation.

No salaries, finder's fees, or other cash compensation are paid to the management team prior to the business combination and the management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams agree to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found. Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fiduciary duties. The SPAC is further prohibited from consummating a business combination with any entity affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders.

Banking[edit]

SPAC Research, an entity running a SPAC database, maintains an underwriter league table which can be sorted by bookrunner volume or other criteria for any year or selection of years.[13] As of January 2021 I-Bankers Securities Inc. stated that it had participated in 132 SPAC IPOs as lead or co-manager since 2004.[14] In the years leading up to 2021, bulge bracket banks started participating in more SPAC IPOs, with Cantor Fitzgerald & Co. and Deutsche Bank Securities Inc. on the cover of 30 SPAC IPOs from 2015 to August 2019.[15] Citigroup, Credit Suisse, Goldman Sachs, and BofA have all built a significant SPAC practice, while Cantor Fitzgerald led all SPAC underwriters in 2019 by book-running 14 SPACs that raised over US$3.08 billion in IPO proceeds.[13]

SPACs in Europe[edit]

In July 2007, Pan-European Hotel Acquisition Company N.V. was the first SPAC offering listed on the Euronext Amsterdam exchange, raising approximately €115 million. I-Bankers Securities has been the underwriter with CRT Capital Group as lead-underwriter.[16][17] That listing on NYSE Euronext (Amsterdam) was followed by Liberty International Acquisition Company, raising €600 million in January 2008. Liberty is the third largest SPAC in the world and the largest outside the U.S.A. The first German SPAC was Germany1 Acquisition Ltd., which raised $437.2 million at Euronext Amsterdam with Deutsche Bank and I-Bankers Securities as underwriters.[18][14] Loyens & Loeff served as legal counsels in The Netherlands.[19]

In March 2021, a report prepared by Lord Hill for the Chancellor of Exchequer recommended a series of changes to London company listing rules to make them more favorable to SPAC listings.[20] Among the report's proposals is to reduce the percentage of shares that must be offered to the public from 25 percent to 15 percent.[21]

SPACs in emerging markets[edit]

Emerging market focused SPACs, particularly those seeking to consummate a business combination in China, have been incorporating a 30/36 month timeline to account for the additional time that it has taken previous similar entities to successfully open their business combinations.

History[edit]

Since the 1990s, SPACs have existed in the technology, healthcare, logistics, media, retail and telecommunications industries. Their history began with investment bank GKN Securities, specifically, founders David Nussbaum, Roger Gladstone and Robert Gladstone, who later founded EarlyBirdCapital with Steve Levine and David Miller (currently managing partner of Graubard Miller law firm) and who developed the template.

However, since 2003, when SPACs experienced a resurgence, SPAC public offerings have sprung up in a myriad of industries such as the public sector, mainly looking to consummate deals in homeland security and government contracting markets; consumer goods; energy; construction; financial services; media; sports and entertainment; and in high-growth emerging markets such as China and India.

In 2003, the lack of opportunities for mid-market public investors to "back" experienced managers, combined with the trend of upsizing private equity funds, pushed entrepreneurs to directly seek alternative means of securing equity capital and growth financing. At the same time, the rapid growth of hedge funds and assets under management and the lack of compelling returns available in traditional asset classes led institutional investors to popularize the SPAC structure, given its relatively attractive risk/reward profile. SEC governance of the SPAC structure and the increased involvement of bulge bracket investment banking firms such as Citigroup, Merrill Lynch and Deutsche Bank has further served to legitimize this product and perhaps created a greater sense that this technique will prove useful over the long term.

SPACs are forming in many different industries and are also being used for companies that wish to go public but otherwise cannot. They are also used in areas where financing is scarce. Some SPACs go public with a target industry in mind while others do not have preset criteria. With SPACs, investors are betting on a SPAC's management's ability, intending to profit from it.

SPACs compete directly with private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these three groups could result in a bid for the best company and possibly increase valuations.

Graph-diagram of the number of IPO companies which used SPAC to go public

SPAC IPOs have seen resurgent interest since 2014, with increasing amounts of capital flowing to them.[22]

  • 2014: $1.8bn across 12 SPAC IPOs
  • 2015: $3.9bn across 20 SPAC IPOs
  • 2016: $3.5bn across 13 SPAC IPOs
  • 2017: $10.1bn across 34 SPAC IPOs
  • 2018: $10.7bn across 46 SPAC IPOs
  • 2019: $13.6bn across 59 SPAC IPOs
  • 2020: $83.3bn across 248 SPAC IPOs

The success of SPACs in building equity value for their shareholders has drawn interest from investors such as Bill Ackman who had backed three SPACs as of 2015, including the SPAC that took Burger King public.[23][24][25][26]

As the popularity of SPACs increased during the 2010s, equity funds such as TPG, Riverstone, THL and others sponsored SPACs.[citation needed]

By virtue of being public companies, SPACs may be targeted by short sellers or "greenmail" investors. Typically, short sellers have not been very active in SPACs, since the stock price remains fairly steady unless there is a transaction announced. Most SPAC shares are held by large hedge funds and institutional investors, who do not actively trade the stock until after the closure of the initial business combination. SPACs have incorporated provisions that prevent public shareholders, acting alone or in concert, from exercising redemption rights in excess of 20% shareholding, and such shareholders cannot influence executive management.[citation needed]

SPACs and reverse mergers[edit]

An IPO through a SPAC is similar to a standard reverse merger. However, unlike standard reverse mergers, SPACs come with a "clean" public shell company, better economics for the management teams and sponsors, certainty of financing/growth capital in place - except in the case where shareholders do not approve an acquisition, a built-in institutional investor base and an experienced management team.[citation needed] SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies going public in standard reverse mergers.

SPACs typically raise more money than standard reverse mergers at the time of their IPO.[citation needed] The average SPAC IPO in 2018 raised approximately $234 million compared to $5.24 million raised through reverse mergers in the months[quantify] immediately preceding and following the completion of their IPOs.[citation needed] SPACs can also raise money faster than private equity funds.[citation needed] The liquidity of SPACs also attracts more investors,[citation needed] as they are offered in the open market.

Hedge funds and investment banks are interested in SPACs because the risk factors seem to be lower than in standard reverse mergers.[citation needed] SPACs allow the targeted company's management to continue running the business, sit on the board of directors and benefit from future growth or upside as the business continues to expand and grow, with a public company structure and its access to expansion capital. The management team members of the SPAC typically take seats on the board of directors and continue to add value to the firm as advisors or liaisons to the company's investors. After the completion of a transaction, the SPAC usually retains the target company's name and registers to trade under that name on the NASDAQ or the New York Stock Exchange.

Regulation[edit]

In the United States, the SPAC public offering structure is governed by the Securities and Exchange Commission (SEC). A public offering for a SPAC is typically filed with the SEC under an S-1 registration statement (or an F-1 for a foreign private issuer) and is classified by the SEC under SIC code 6770 - Blank Checks. Full disclosure of the SPAC structure, target industries or geographic regions, management team biographies, share ownership, potential conflicts of interest and risk factors are standard material covered in the S-1 registration statement. It is believed that the SEC has studied SPACs to determine whether they require special regulations to ensure that these vehicles are not abused like blind pool trusts[clarification needed] and blank-check corporations have been over the years. Many[who?] believe that SPACs do have corporate governance mechanisms in place to protect shareholders. SPACs listed on the American Stock Exchange are required to be Sarbanes-Oxley compliant at the time of the offering, including such mandatory requirements as a majority of the board of directors being independent, and having audit and compensation committees.

Statistics[edit]

According to an industry study published in January 2019, from 2004 through 2018, approximately $49.14 billion was raised across 332 SPAC IPOs in the United States. In that period, 2018 was the largest year for SPAC issuance since 2007, with 46 SPAC IPOs raising approximately $10.74 billion. SPACs seeking an acquisition in the energy sector raised $1.4bn in 2018, after raising a record $3.9bn in 2017. NASDAQ was the most common listing exchange for SPACs in 2018, with 34 SPACs raising $6.4bn. GS Acquisition Holdings Corp. and Churchill Capital Corp. raised the largest SPACs of 2018, with $690mm each in IPO proceeds.[27] In 2019, 59 SPAC IPO's raised $13.6 billion.[22] Nearly 250 SPACs raised more than $83 billion in 2020. In the first month of 2021 there were 75 SPACs.[28]

In a March 2020 event, Allison Lee acting chair of the SEC, said that the "investment returns don't match the hype surrounding the SPAC bubble".[29]

See also[edit]

References[edit]

  1. ^ Domonoske, Camila (2020-12-29). "The Spectacular Rise Of SPACs: The Backwards IPO That's Taking Over Wall Street". NPR. Archived from the original on 2021-02-22. So what is a SPAC? A "special purpose acquisition company" is a way for a company to go public without all the paperwork of a traditional IPO, or initial public offering. In an IPO, a company announces it wants to go public, then discloses a lot of details about its business operations. After that, investors put money into the company in exchange for shares. A SPAC flips that process around. Investors pool their money together first, with no idea what company they're investing in. The SPAC goes public as a shell company. The required disclosures are easier than those for a regular IPO, because a pile of money doesn't have any business operations to describe. Then, generally, the SPAC goes out and looks for a real company that wants to go public, and they merge together. The company gets the stock ticker and the pile of money much more quickly than through a normal IPO.
  2. ^ a b Broughton, Kristin; Maurer, Mark (September 22, 2020). "Why Finance Executives Choose SPACs: A Guide to the IPO Rival". The Wall Street Journal. Retrieved 22 February 2021.
  3. ^ "Blank Check Company". SEC.gov. U.S. Securities and Exchange Commission. Retrieved 26 August 2020.
  4. ^ a b Ramkumar, Amrith; Farrell, Maureen (January 23, 2021). "When SPACs Attack! A New Force Is Invading Wall Street". The Wall Street Journal. Retrieved 22 February 2021.
  5. ^ a b Naumovska, Ivana (February 18, 2021). "The SPAC Bubble Is About to Burst". Harvard Business Review. Retrieved 22 February 2021.
  6. ^ Tse, Crystal (August 27, 2020). "Blank Check IPOs, the Status Symbol of 2020, Have Raised $32 Billion This Year". Bloomberg. Retrieved 22 February 2021.
  7. ^ Ren, Shuli (March 8, 2021). "SPACs Are 'the Poor Man's Private Equity Funds'". Bloomberg Businessweek (4691): 72. ISSN 0007-7135. Retrieved 9 March 2021.
  8. ^ Li, Yun (10 February 2021). "Unusual first-day rallies in SPACs raise bubble concern: 'Every single one of them has gone up'". CNBC. Retrieved 18 February 2021.
  9. ^ "17 CFR § 230.419 - Offerings by blank check companies". LII / Legal Information Institute. Retrieved 2021-02-23.
  10. ^ Langager, Chad. "What are the fifth-letter identifiers on the Nasdaq?". Investopedia. Retrieved 2021-02-13.
  11. ^ "SPACs explained | Fidelity". www.fidelity.com. Retrieved 2021-02-26.
  12. ^ "Special Purpose Acquisition Company (SPAC) – Definition". WGP Global.
  13. ^ a b "Underwriter League". SPAC Research. Retrieved 18 January 2021.
  14. ^ a b "Completed Transactions". I-Bankers Securities. Retrieved 18 January 2021.
  15. ^ "Special Purpose Acquisition Company Database | SPAC Research". www.spacresearch.com.
  16. ^ "Data". www.afm.nl. Retrieved 2021-03-07.
  17. ^ "Mondo Visione - Worldwide Exchange Intelligence". mondovisione.com.
  18. ^ Cowie, Dawn (July 23, 2008). "Germany1 Acquisition raises $437.2 million" – via www.wsj.com.
  19. ^ "Data". www.afm.nl. Retrieved 2021-03-07.
  20. ^ Thomas, Daniel; Stafford, Philip (March 3, 2021). "UK listing rules set for overhaul in dash to catch Spacs wave". THE FINANCIAL TIMES LTD. Retrieved 3 March 2021.
  21. ^ BBC News (March 3, 2021). "Hill review: London takes aim at Amsterdam with new listing rules". BBC.co.uk. BBC. Retrieved 3 March 2021.
  22. ^ a b "US SPAC IPO Issuance". SPACResearch.com. SPAC WIRE LLC. Retrieved 27 June 2020.
  23. ^ Gara, Antoine (2014-08-27). "Ackman's Pershing Square a Quiet Winner in Burger King's Tim Hortons Deal". TheStreet.com. New York. Retrieved 2020-07-02.
  24. ^ Bill, Ackman. "Ackman and Burger King".
  25. ^ Bill, Ackman. "Bill Ackman invests $350 million in SPAC".
  26. ^ Bill, Ackman. "Ackman in Platform Specialty SPAC".
  27. ^ SPAC Research, SPAC Market Trends, January 2019
  28. ^ Saldanha, Ruth (January 28, 2021). "SPACs Party Like It's 2020". Morningstar.com. Retrieved 2021-02-12.
  29. ^ Bain, Benjamin (11 March 2021). "SPAC Investment Returns Don't Match 'Hype,' SEC Chief Says". Bloomberg News. Retrieved 13 March 2021.

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