COVID: The Exclamation Point on a Sentence Already Written… SPACs are back!
By Laura Stavisky, RFBL Student Editor
In recent years, more companies are going public through an unconventional model. Rather than endure the IPO process, companies are opting to merge with a Special Purpose Acquisition Company (SPAC) instead. A SPAC is a company which is created for the sole purpose to acquire a private company which would then become a public after the merger. A SPAC raises funds through an IPO; the company has no commercial operations, so the disclosure process for its initial IPO is significantly easier. Shareholders buy shares in the SPAC, essentially betting on the management team. The management team then has typically two years to find a target company to acquire. Upon selection, SPAC shareholders have a choice to keep their money in the SPAC or pull their investment and walk away. After the merger, SPAC shares are converted into shares in the acquired company, now public.
Why do target companies go public this way? For one, IPOs are a long process with many disclosures. As some have argued, “[t]he market is not structured to quickly turn well-hyped businesses into public companies.”[1] The timeline between identifying a target company and the merger is typically 12-18 weeks. Additionally, the only disclosures required by the target company are those requested by the SPAC; however, the acquisition of the target company will go through the SEC’s process (and provide the required disclosures) but only for the evaluation of the merger. The deals are done directly between the two companies, which allows for a quick process and less risk to investors. An IPO provides no guarantees as to the payout for the private company’s investors. A SPAC merger comes with a price upfront.
Before the pandemic, SPACs were on the rise. One cited reason is that a bull market is better for SPAC growth because “it’s an easy way for people to deploy their capital.” Despite some stocks of companies which went public through a SPAC underperforming as compared to companies who chose to go the traditional IPO route, many private enterprises are still considering this route at high rates. While there were only seven SPAC IPOs in 2010 (with an average size of $71.8 million), there were fifty-nine in 2019 (averaging $230.5 million). However, 2020 has seen a steep incline, with ninety-seven SPAC IPOs thus far and an average size of $390.7 million. COVID and the market instability that has followed has not created the ideal environment for IPOs. The long process is deterring companies who may have planned to go public this year. Instead, companies are opting for quick, behind-the-scenes negotiations rather than leaving their pay day up to today’s highly unpredictable market. While it is difficult to predict nearly anything with regards to the market today, the prevalence of SPAC mergers is likely something here to stay.
Sources
https://www.nytimes.com/2020/08/25/business/dealbook/spac-ipo-boom.html
https://techcrunch.com/2020/08/21/almost-everything-you-need-to-know-about-spacs/
https://marker.medium.com/why-spacs-are-the-new-ipo-dcefe54b4bdd
[1] https://marker.medium.com/why-spacs-are-the-new-ipo-dcefe54b4bdd