Would you hand your money to a company that has no operating results, lacks a history, and may have no plans, arrangements or understandings with respect to any prospective target business? It seems that investors are increasingly keen to do exactly that.
Special Purpose Acquisition Companies (SPACs) are not a new species (going back to the 1990ies, with the blank check companies of the 1980s as predecessors), but one of the trendy topics of 2020. As per today, 235 SPAC IPOs raised 46% of the aggregate funds raised in IPOs in the USA this year. You might not be familiar with Acquisition V, Spartan Acquisition II, 10X Capital Venture Acquisition or Far Peak Acquisition. However, just these four entities raised a combined USD 1.3 billion in initial public offerings since September 2020. On top of this, Bill Ackman's Pershing Square Tontine Holdings raised a record-breaking USD 4 billion in July, now waiting to deploy its firepower of USD 5 to 7 billion on a unicorn. SPAC veteran Sir Martin Franklin believes that the current frenzy will "end badly”, although he has plans to raise another SPAC himself.
A SPAC changes the traditional process of going public: first it raises funds in an IPO to put them in a trust account, then it searches for a business to acquire, which, at the closing of this so-called De-SPAC transaction, becomes public without going through a traditional IPO process. Typically, if a SPAC is not able to complete a De-SPAC transaction within 24 months, it will hand funds back to investors, unless extended by a shareholder vote.
Are SPACs a blank check or blind faith? This is for the investors to decide. However, there are a few considerations for M&A practitioners going into 2021:
While it is too early to judge whether SPACs are here to stay as a third path to public markets in the long term, as venture capital veteran Bill Gurley (not without self-interest) suggests, they will definitely have an impact on the 2021 M&A landscape.
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