Introduction
Special Purpose Acquisition Companies, or SPACs—commonly referred to as a blank-check company—have been creating waves in the financial sectors for their role in changing the M&A deal landscape. For years, companies have used SPACs as an alternative way of going public and generating funds.
A SPAC, a special purpose acquisition company, is formed to raise capital through an initial public offering so that it can proceed with the acquisition of another company. SPACs do not have business operations or stated acquisition targets in the IPO. SPAC investors range from known private equity funds and celebrities to the general public. They have two years to acquire, or otherwise, return their funding to investors.
Special Purpose Acquisition Companies (SPAC)
A Special Purpose Acquisition Company (SPAC) is a publicly traded entity that can be incorporated for the specific reason of raising investment capital through a unique form of IPO. This type of corporate entity allows investors to fund a pool of money that would then be used to purchase one or more unidentified businesses, which could be selected following the IPO. Because of that, special purpose acquisition companies are also known as “blank-check companies.”.
A SPAC is a publicly traded corporation with a two-year lifespan designed to do only one thing, i.e., to complete a merger, or “combination,” with a privately held business to bring that business public. SPACs raise capital primarily from public-equity investors and hold the potential to derisk and shorten the IPO process for target companies, often providing them with better terms than a traditional IPO would.
SPACs came into existence on the periphery of the dot-com era’s mania for IPOs in the 1990s. This often happens in industries like oil and gas exploration, where it is not easy to issue traditional IPOs because the business is highly speculative. However, SPACs have since come to acquire a bad name as dubious operations, almost scam-like, in that SPAC sponsors—these are typically celebrities or other known personalities—get a 20% promotion interest for a relatively minimal investment and therefore have an advantageous upside with a disproportionately lesser risk compared with normal investors.
The role of SPAC in M&A
Special Purpose Acquisition Companies (SPAC) is a major part of merger and acquisition (M&A) by providing a way for companies to go public without going through a traditional IPO.
Speed is one of the main advantages of going the SPAC route for doing M&As. That’s because where a traditional IPO process may take a few months to finalize, a SPAC merger affords quicker access to the public markets through which companies can get their capital more swiftly.
SPACs also provide companies with more flexibility and predictability when choosing to go public. Companies that experience an IPO process do not need to face uncertainty and price volatility because the terms of the deal are agreed upon beforehand in the SPAC due to its negotiated deal structure and valuation. Accordingly, companies can commit the funds they need while executing their growth plans in a more predictable and controlled process.
Another notable is its democratization potential of investment opportunities and assessment of the public market. In SPAC, both retail and institutional investors can participate on the offering side; therefore, it’s a much more inclusive and transparent investment vehicle for a wide range of participants. Such democratization of capital formation has changed the landscape of the M&A world by giving companies and investors alike the ability to make value-creating transactions.
There are many opportunities and benefits for companies and investors, but of course there are potential challenges and things to watch out for. These include regulatory attention, market violations, and the performance of entities post-acquisition. It is very important for any viability test of a SPAC transaction. Transparency, due diligence, and alignment of interest among sponsors, investors, and target companies will determine the success and sustainability of SPAC deals.
Conclusion
SPAC is an investment vehicle created with the intention of raising capital, through an IPO, to acquire a private company. These companies are often termed blank check companies, as they are formed without a specific acquisition target in mind.
The funds realized from the IPO are then used by the SPAC to seek and acquire a private company, which is then taken public through a reverse merger. It allows the private company to raise further capital and access the public markets without the process of a traditional IPO. Though very popular nowadays as an alternative to the traditional IPO, the SPAC market has soured since their numbers rose sharply early in the 2020s.