Much like other things in the business world, the stock market has always embraced change. One of the most popular trends in the field is the SPAC, or a special purpose acquisition company. These companies exist to hold cash and raise capital. While SPACs have existed for some time, they surged in popularity in the tail end of the 2010s. In 2021, above 300 SPAC IPOs are now available in the US and growing.
SPACs are also called blank check companies and are a mechanism for purchasing private businesses or companies without a regular initial public offering. The 2020s begun with about 50 of these companies, amassing a collective value of over $20 billion. As they grow in popularity, SPACs have caught the attention of celebrities, business moguls, and other investors. Fields such as green technology and electricity are among the most well-known SPAC categories.
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SPAC Vs Traditional IPO
What is the difference between a SPAC and a traditional IPO? The truth is the differences lie in what a particular investor or shareholder looks for in a business arrangement. Traditional IPOs have been around for much longer, dating back to the 17th century. The process is so archaic that people have been trying to innovate it and replace it with a more efficient manner of dealing with buying companies.
However, there is some merit to pursuing a traditional IPO simply because it is tried and tested. The process begins with a consultation period with financial institutions, analysts, and possible investors. For deals to materialize, people must undergo drafting parties or IPO Roadshows. In a way, these function as pitches to the world about what the company is.
Analysts tout SPACs as an alternative option to the traditional IPO method. There were initial reservations about how they operate because of the blind nature of these companies. For instance, people create SPACs before they fully take shape, and they begin to pool funding before finding out its niche and mandate as a business. This unorthodox method has allowed companies to go public at faster rates. By going public faster, parties also avoid paying a heftier amount of fees.
SPACs have about two years to look for a company to acquire before breaking down and releasing its funds to the investing parties. While they seem to be a new commodity in the stock market, SPACs are essentially a kind of reverse merger. This comparison holds because SPACs are private companies that “merger” with a private company, making it public as a result. It is worth noting that not all reverse mergers are SPACs because companies involved in mergers are not always blank slates. For 2021, here are some of the best SPAC mergers that merged with majority of votes.
In the past, reverse mergers were also controversial because of fraud. The Securities and Exchange Commission stopped that trend when it suspended trade operations for over 800 corporations.
What makes SPACs lucrative now is that they enable smaller businesses to go public faster. In addition to gaining more funding and resources, they also get the opportunity to be noticed by other players in the industry.
Benefits of SPAC Over Traditional IPO
SPACs come with a wide range of benefits besides being a new way of dealing with businesses. For instance, they accelerate the public listing process for many small-time companies that would not have the same backing otherwise. The faster turnaround also comes with fewer risks in pricing and markets since SPACs must find target companies within two years before dissolution. This helps employees gain resources for benefits and compensation.
The target company also gains capital in the process. Due to this, it can sustain growth and investment without accruing as much debt in a traditional IPO. The assets also serve as permanent capital, incentivizing the company to work hard to achieve its goalposts. In the lucrative industries today, innovation is a must, and specialists must take steps to remain at the forefront.
There is also no risk of dealing with liabilities or previous baggage from past deals. SPACs are blank slates, and they come with no history. This fact makes it easier for shareholders to protect their reputations in the business world. There is also less chance of scrutiny from contemporaries in the industry.
By nature, SPACs also offer flexible options in terms of ownership and management. SPACs do not necessarily have to micromanage the target companies. The brains behind the operation can stay on board, depending on the type of acquisition that happened. Although there are cases of a 100% acquisition, there are also partnership types of deals. In addition, there are still investors who value the intellectual prowess of the target’s founders and will even place their trust and resources in them.
Benefits for Companies
SPACs offer great benefits for the companies. These benefits include:
Certainty: Companies can negotiate the terms of their offering that gives employees and shareholders better certainty. Traditional IPOs don’t offer this scheme.
Speed: The SPAC merger process can take anywhere between 2-4 months whereas Traditional IPOs over a year or two.
Partnership: Experienced partnership and leadership while going public and help a company greatly.
Benefits for Investors
Investors can greatly benefit from SPACs over traditional IPOs. SPACs are more investment friendly and provide more profit opportunities for the investors.
Involvement of Retail Investors: Traditional IPOs can’t be accessed by retail investors but this is not a problem in SPACs.
Redeem Shares: If investors are not happy with their investment, they can just withdraw their shares and get thier money back.
Profit Opportunities: Investors can purchase additional shares after company acquisition. This gives them additional opportunities to get more profit.
Benefits for Sponsors
Being a sponsor you unlock yourself a wide range of benefits which include:
Early Access to Capital: SPACs are really simple to understand and you have to face lower regulatory hurdles that make this route easy to proceed.
Better Upside: Sponsors receive 20% of company shares which means they can still get millions of dollars even if the shares drop.
Late-Stage Investment: SPACs allow sponsors to invest in late-stage private companies and can directly drive strategy for the IPO.
There is also the added benefit of sponsors providing industry advice and networking to the target company. This tie-up can double as a mentorship role. Besides serving as a way for the company to gain financial resources, sponsors can also help the workers stay on the right track in operations, marketing, and other factors.
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