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Marrying a unicorn? Demystifying Special Purpose Acquisition Vehicles

You would’ve probably come across hedge fund manager Bill Ackman’s latest move involving Special Purpose Acquisition Companies (SPACs). He floated the world’s largest ‘blank check’ company ever, with almost $4bn worth of capital to potentially acquire a suitable unicorn startup(s).

He described the move as ‘marrying a unicorn’, as he intends the newly created shell company to take attractive private companies public through an acquisition/merger. He endorsed the idea over traditional IPOs, describing the latter to be a risky and inefficient route. As his move made a lot of noise in Wall Street lately, we decided to demystify SPACs in today’s post.

Blank Check Company: It is an entity with no established business plan or a purpose at the time of its incorporation. Some of the common uses can be to engage in an M&A transaction with an unidentified entity in future or simply to save taxes for big corporations. To protect those who invested in the blank-check company, most if not all of the money raised is deposited in an escrow account or a trust, until the acquisition is agreed upon.

What is a SPAC? It is a special type of blank-check company or a shell company, formed only for the purpose of acquiring or merging with an existing company.

Workings: SPACs usually raise money from the public through an Initial Public Offering and can fully or partially be sponsored by its owner (Private Equity firms or Hedge Funds). Retail investors get a unique, yet rare, opportunity to invest in a company along with a private equity firm or a hedge fund. Once a listed SPAC successfully acquires / merges with its target, it takes on the identity of the business that it has acquired.

The Catch: A SPAC has about 18-24 months to acquire a target company and close the deal after having raised money from the public. Failure to do so would require its liquidation and the money will be returned to the investors.

Industry Growth: The SPAC issuances have shot up over 1500% in the last 8 years which speaks authoritatively about the growing industry.

Source: SPAC Search

The leading bookrunners: Citigroup followed by Credit Suisse and Cantor Fitzgerald have the highest deal flow in the US as bookrunners (c.40% of the SPAC issuances) as reported by SPAC Search over the last 5 years. 

With growing SPAC issuances, we think investment banks will eventually step up their game in their SPAC practice to capitalize on this steadily growing market.

Not a Reverse Merger: In a reverse merger (also called a reverse IPO), a private company acquires a listed company to go public. It helps private companies save tax and get listed at a fraction of the cost and time as compared to an IPO. SPAC IPOs, though seemingly similar to a reverse IPO, have several advantages over the latter in terms of structure, expenditure, and other areas. A SPAC is also less risky as it cannot utilize any capital raised other than to acquire a target company. However, a reverse IPO lacks a comprehensive due diligence process.

SPACs as an alternative to IPOs: A SPAC-led IPO of a company provides a less risky and inexpensive method for it to go public as compared to the traditional route or a reverse merger. SPAC listings have lower direct costs and underwriters’ fees. In addition, SPAC IPOs take on an average 3 months to complete as compared to a traditional listing which takes about 10 months. Further, during a SPAC IPO, there is also a certainty on the offer price with a limited risk from fluctuating markets.


Disclaimer: Views expressed in content linked to this website or posted in social media are by Ananthu Santhosh and Aseem Mehra and are personal. The information is not directed to any investors or potential investors, and do not constitute an offer to sell — or a solicitation of an offer to buy — any securities, and may not be used or relied upon in evaluating the merits of any investment. The content should not be relied upon in any manner for the purposes of investment, legal, tax, or other advice.


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