Special Purpose Acquisition Company – Risks and Opportunities


Special Purpose Acquisition Companies (SPACs) have been strategically set up as a capital-raising alternative to initial public offerings (IPO). SPACshave been used by many strategic founders, investors and sponsors for quite some time. As such, SPAC transactions may eventually result in the private operating company (Target) to become a publicly-listed company in the stock exchange. SPAC deals require the Target to spendnumerous time and resources available to ensure the SPAC transactions are successful and rewarding.

As the trends continue in recent months, SPACs may have officially replaced the IPO as a new way for blank-chequecompanies to go public. Many investors are attracted to the idea that SPACs offer good return potential and are sound investments in the foreseeable future.However, SPAC investors should be aware that it comes with significant risks as SPACS deploy its funds to make an acquisition within a limited time frame which puts much pressure which may result in less strategic acquisitions.

Even though SPACs have been used for so many years as alternative investment vehicles, they have recently come into the attention and minds as seasoned investors and experienced management teams have turned to SPACs to reduce the increased market risk of traditional IPOs. This trend has been driven by high-profile investors pursuing and taking part in the SPAC space to take advantage of the abundance of uninvested capital sitting and available in the balance sheet to invest.

Strategic Considerations of SPACs

SPAC’s greatest strategic imperatives are the flexibility it offers in the deal making process for founders, sponsors and investors as well as target companies and the options available to SPACs to acquire several private companies. Many investors take into account SPACs in the same way they consider an IPO, as both structures take private assets into the publicly traded markets which are very much the same as what an IPO takes place.

As SPACs execute its strategies, it is possible for them to use a SPAC in the same way as an IPO, and take a single private company public, or alternatively to buy a few private companies, and then take all the assets public via a reverse merger into a single SPAC.

In terms of funding strategies, SPACs also allow multiple rounds of financing deals, and also can even issue equity at any time once it is listed as a public company. Much like any other publicly-listed company, a SPAC can enter into debt deals or issue warrants, which is a far more flexible architecture than an IPO.

Considering their investment strategies, the institutional investors who invest their capital in SPACs have much more control over how it is used when compared to an IPO, which is just one more way that SPACs deliver clear advantages over IPO architecture. When it comes to risks, SPACs can minimise risks to investors.

Process, Timeline and Lifecycle of SPACs

Understanding the lifecycle and process of a SPAC strategically can help target company leadership and management teams better informed of the complexities, stress and time pressure involved in managing and completing a SPAC transaction.

As outlined in the above chart (PwC, 2021), in the formation phase, normally a financial sponsor (or sponsors) sets up a management team and funds an equity stake or founders/owners stock in the SPAC. After that, the equity investment funds initial business operations to launch an initial public offering (IPO) and identify an acquisition target company. The founders stock often represents approximately 20% of the post-offering stock, although the ratio may vary depending on the term.

Once underwriters are selected, the SPAC files a registration statement with the stock exchange to initiate the IPO. Then the SPAC begins a road show that culminates in underwriting and the IPO, the proceeds of which are held in a trust account pending an investment opportunity. Capital is raised by issuing common stock and warrants. 

As for the target search, at this point the SPAC launches its search earnestly for an acquisition target. SPACs approximately have two years from the IPO date to complete an acquisition. The SPAC conducts due diligence on potential targets. However, because shareholders can redeem shares, the sponsors need to closely monitor cash to ensure there is sufficient funding to acquire the target and manage post-close operations. At this point, convertible debt may be issued, which converts to stock atthe investor’s choice, thereby diluting the equity of existing shareholders. 

The selection process ends with a definitive agreement between the SPAC and an acquisition target.The de-SPACingprocess requires the buyer to obtain shareholder approval in accordance with the stock exchange regulations.Typically, the process includes the commitment of the founders shares to the acquisition, a redemption offer whereby SPAC shareholders can redeem their shares. Once the acquisition is complete, the company must comply with all public company reporting obligations.

Opportunities and Investment Benefits of SPACs

SPACs are a way for investors to find unique opportunities to get a high return on investment (ROI) and capital gains on their investments. SPACs continue to gain popularity as a potential liquidity option for many companies. The SPAC merger process with a target company may be completed in as little as three to four months, which is substantially shorter than a typical traditional IPO timeline. Accordingly, a target company must accelerate public company readiness well in advance of any SPAC merger. Further, given the compressed timeline of a SPAC merger, project management is essential in order to reduce execution costs, increase project efficiencies, good accounting controls and reporting, and provide working group participants with enhanced accountability and transparency.

One of the most appealing things about SPACs is that they provide good hedging against potential downside risks and at the same time provide upside opportunities. The value proposition of a SPAC is an ownership stake opportunity in a solid company with good long-term potential for investors. Keep in mind that not all SPACs promise to give investors their money back in every investment and circumstance. They have to make sure they read the prospectus carefully before investing. Historically, the trend has been for the SPAC to return the investors’ capital should a suitable acquisition fail to present itself. This is something that is ironed out in the terms and conditions of the SPAC agreement.


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