Some time back, Bloomberg published data. This year through mid-May, SPACs has raised USD 11.5 billion on the US exchange. Compared with 317, which increased by USD 102 billion at this point last year. But doesn’t it raise a question as to What exactly is SPAC? Why is such a load of money being poured into SPAC? And why did it see a vast plunge this year? Let’s break it one by one……….
What exactly is SPAC?
Special Purpose Acquisition Vehicle (SPAC) is also referred to as a blank cheque company that has no actual or commercial operations and is formed to raise capital from the public through an Initial Public Offer (IPO) with the motive of taking a privately held company (Target) public with the money raised in a given timeframe. But now, you might ask, private companies could raise money through the traditional IPO process, so why through SPAC?
There are several benefits to getting listed through SPAC instead of the traditional route. Privately held companies can go public via SPAC in a few months than the traditional route, which takes much more time and is tedious. Target companies generally can negotiate premium prices for their stock because SPAC has a limited time to make deals with the target company. If well-known financiers and business executives sponsor the SPAC, the target company gets good visibility in the market.
One of the high-profile deals involved Venture capitalist Chamath Palihapitiya’s SPAC Social Capital Hedosophia Holdings, which bought a 49% holding in Richard Branson’s Virgin Galactic for $800 million before the company got listed in 2019.
It has been a thorny path for SPAC and target but especially for investors. Companies like Virgin Galactic Holdings are around $6 per share, touching the high of $62. Nikola reached almost $66 last June but now is about $6 after a scandal. This has brought the issue into the limelight for the Securities and Exchange Commission (SEC). They have made tight regulations and increased disclosure requirements for the SPAC and target. Investors’ wealth deteriorates, and because of it, the SPAC cannot raise money, and if they can raise it, they aren’t able to find a lucrative target to acquire.
It seems the hype about SPAC is over; investors realise the true potential of the SPAC. What do you think about the SPAC? Would you invest in a SPAC company?