A Special-Purpose Acquisition Company (SPAC) is a shell company set up to raise money through an Initial Public Offering (IPO) and then merge or acquire with an actual company. Such a company has no commercial operations and is set up for the sole objective of raising capital through IPOs. These funds are then used to acquire/merge with companies looking to get listed. Some even call them ‘Blank Cheque Companies’.
In a way, it is a backdoor entry to the public market for a private company looking to get listed on the stock exchange. It is considered to be a more convenient shortcut for some firms.
Timeline of a SPAC merger:-
- Formation and IPO Phase: SPAC is formed by an experienced team of managers, who generally hold around 20% of the stake in the SPAC. The remaining stake is offered to the public through IPOs. The funds are placed in interest-bearing trust accounts till the process gets over.
- Target Search: In this step, SPACS search for potential targets with which they can merge. Deals are scanned, keeping in mind that SPAC IPOs are typically based on the intent to find target companies in particular sectors and/or geographies.
- Negotiation: This step involves negotiating with the target company selected in the above step. The objective is to create value through these negotiations.
- Agreement and approval: once an agreement is reached with the target and support is received in investor and shareholder meetings, the SPAC can complete the merger. This is called De-SPACing.
- Negotiation fails/Approval not granted: in either of these cases, the SPAC can either return to step 2 and search for targets, or it can dissolve. The former requires SPACs to do the process all over again; the latter means winding up the SPAC and returning money to investors collected in step 1.
Why is this route attractive for private firms looking to go public?
- The company need not convince multiple investors by going on IPO roadshows.
- A SPAC merger is a quicker way of getting listed. It can be completed in 3–4 months instead of the 9 plus months for an IPO.
- SPAC listings are cheaper than traditional IPOs in terms of transaction fees.
- The regulatory framework looks more favorable than the scrutinies of a traditional IPO.
All these factors have led to the recent SPAC boom.
SPACs have disadvantages too. It’s not a fairy tale, after all:-
- However easy it may look, the current regulatory framework in India is not supportive of the SPAC route.
- SPACs tend to display poor performance once the two entities are merged.
- The structure of SPACs results in a high dilution of shareholding of sponsors, private investors, and the general public.
- One should also consider the costs and benefits of such an indirect foreign listing through SPACs and compare it to that of a direct local listing through IPOs.
- The high valuations by SPAC listings can be risky in the medium to long run.
In conclusion, merging or being acquired by a SPAC might seem like an advantageous course of action for some private firms. However, the pros of the same should not be looked at in isolation, and the choice between the two methods should be made, keeping in mind the above caveats.
By Shraddha Talwar
Shraddha is a second-year Economics student at Lady Shri Ram College for Women. As a member of the GAEE’s Finance vertical, she is interested in exploring topics of high finance, including but not limited to Mergers & Acquisitions, Banking, and Venture Capital.
