SPECIAL PROPOSE ACQUISITION COMPANY
ATTRACTION OF THE BEST OFFER
This guide describes all the steps, processes, and scope of a Special Propose Acquisition Company (SPAC).
1. What is a SPAC?
Special-purpose acquisition companies (SPACs) are shell companies that do not have the day-to-day operations of a typical organization. Instead, they are created solely to raise capital through an initial public offering (IPO), which they subsequently use to acquire or merge with another business or business. SPAC, also called “blank check” companies are traditionally formed by sophisticated investors — hedge funds, private equity firms, and serial entrepreneurs initially backed by more prominent institutional investors. The sponsors have expertise and experience in specific industries that generally inform the targets they’ll be pursuing.
When a SPAC is formed and completes its IPO, the capital raised is placed in a trust account that earns interest. The funds can only be used for an acquisition, but the SPAC may be able to use the claim for any working capital needs. While SPACs are not precisely novel — they’ve been around for decades — interest and awareness have been proliferating, both on the investor side and in companies who want to go public but do not necessarily want to follow the traditional IPO route.
1.1. What are the benefits of SPAC?
1.1.1. Benefit 1: A Faster Process
It’s no secret that IPOs can take a while to complete. The average IPO takes four to six months if managed efficiently and correctly. However, it can take up to a year or more, depending on the complexity and the review process. This is not the case with a merger into a SPAC, which typically takes three to four months or less. It’s for this reason that so many companies are choosing to go the SPAC route instead of traditional IPOs. Remember, speed is a benefit, but it’s also a risk — a shorter timeline toward the acquisition is great, but companies have to be prepared and have a plan for what happens next.
1.1.2. Benefit 2: A Timely Alternative
In addition to taking less time to go public, merging with a SPAC does not require a roadshow. You don’t have to market yourself and gain investor interest. This is a very appealing option considering that travel, in-person meetings, events, and other gatherings are more regulated and can add new risks. As a result, being acquired by a SPAC is a calmer process — drawing less immediate and prolonged attention. And because there is no need for a roadshow, the SPAC can spend more time focusing on targets such as your company, providing greater focus and decreasing the time needed to gain access to the public markets.
1.1.3. Benefit 3: No Share Pricing and More Advantageous Outcomes
In a traditional IPO, a company’s shares must be priced or evaluated before making them available. Several factors are involved in this, and it typically requires an investment bank to perform the research and initiate coverage. Additionally, once the SPAC does go public, your company (the target) can normally expect a more financially advantageous arrangement than a traditional IPO, given the compressed timeframe and reduced all-in costs of pursuing an IPO.
1.2. What is the risk of SPAC?
1.2.1. Risk 1: There’s Still Ample Paperwork
Being acquired by or merging with a SPAC is an excellent opportunity if you’re looking for a strategic partner but don’t want to navigate a traditional IPO's hassles and time commitments. That said, it’s essential to understand that you’ll still have to file a document that provides the details of a merger or acquisition with the Exchange Commission. Many of the requirements are similar to a traditional IPO, such as filing to register your securities with the Exchange Commission. If the necessary paperwork isn’t completed or is submitted incorrectly, companies can encounter regulatory snags that stall the deal and distract executives from crucial business initiatives.
1.2.2. Risk 2: The Accounting and Finance Gap
As an established company, you’ll already have departments such as accounting and finance. However, because a SPAC is a shell company with no operations, it doesn’t have these teams in-house. Most, for instance, will tap third-party partners to manage these roles. Thus a gap can often exist between the capabilities of your organization and the SPAC. Moreover, your internal teams may not have the expertise needed to navigate the steps, the nuanced paperwork requirements, or other strategic considerations that are unique to being acquired by a SPAC.
1.2.3. Risk 3: A Closed Deal Doesn’t Mean the Deal is Done
Depending on your company, additional SPAC risks may emerge following a closed deal. For example, private equity-backed companies have unique considerations because a sale to SPAC won’t constitute a “complete” exit. It can create some nuance as GPs look to maximize their returns through secondary sales following the merger. A third-party can often play a valuable role in helping both sides understand their options and optimize outcomes for all involved.
Additionally, if the deal brings your company into new markets or requires other significant changes, improving processes will help you move forward efficiently and effectively, particularly when formerly private companies adjust to the scrutiny that comes with public company disclosure requirements.