SPAC Mania!
The following article aims to shed light on two questions that I repeatedly encounter in my professional & social circles.
Why would a company choose to go public through a SPAC?
A company chooses to go public through a SPAC mainly because of its speed to market, transparent structure and current momentum. Many people argue that SPACs are quicker to the market because they have lighter regulations which is true to an extent. When a SPAC gets listed, it’s a shell company, therefore, the SEC has less comments and questions due to the lack of financial statements or related material making the auditing process shorter. Once a SPAC finds a target and the business combination takes place, all regulatory demands for public companies need to be met which in some cases can delay the public listing if a company does not comply. However, SPACs are aware of these and take these regulatory demands into consideration when targeting a private company as they also have an expiry date to make an acquisition, which is usually around two years. All in all, in a smooth process, SPACs can help companies go public three months faster than other methods, which can be important for some such as a few healthcare companies amidst a global pandemic. In addition to the more precise time frame discussed above, companies may also decide to go public through a SPAC because of the structure they offer. SPACs are already funded by investors and led by appointed managers, who all have their own reputation. This gives a more transparent and shorter route to capital as well as the type of investors the company will be having relative to an IPO organised with a traditional investment bank. Additionally, SPACs offer more structural flexibility which is always interesting for any company. Two recurring points of discussion are the fact that SPACs can call on private investments in public equity (PIPE) if needed and have a higher ability for storytelling as they can disclose more about projections, therefore encouraging companies at earlier stages such as Nikola among others to go for SPACs. Last but not least, in the current market environment flooded with SPACs, a great company will have abundant choices in choosing a SPAC, giving it leverage to negotiate its terms as there are more SPACs listed that will eventually expire than great companies.
With so many companies going public through SPACs right now, is this the beginning of a trend or is it a FAD?
SPACs have existed since the 90s and came back to light last year thanks to a red-hot market. When the markets keep going up, people’s behaviors change, they become more optimist and are willing to take more risk up to the point where they feel confident enough to invest in SPACs. In other words, they can sometimes give money to managers with no clear project and that may not have great reputations in M&A or even have no reputation at all. Although initial SPAC investors make a virtually risk free investment, the target companies and subsequent investors can, in the long run, be on the losing end. Most of the SPACs created by the current frenzy expire between the end of 2021 and 2023. With the seemingly high amount of SPACs relative to the amount of companies making a sensible target, I believe we should see many SPACs expiring. If the opposite happens, I fear the potential disastrous outcomes that can result from incentive driven SPAC managers in the following years. Ultimately, I believe that SPACs will remain a trend for a select few managers that have mastered the process such as the ones coming out of the Private Equity field and will be a fad for the rest.
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