SPAC: Empty Shell or Cash Churning Machine?
Special Purpose Acquisition Companies are recently receiving a lot of attention. The concept is not new; in fact, it’s been around for decades. However, since the last two years, SPACs have really taken off. What exactly is a Special Purpose Acquisition Company? Let’s dig a little deeper!
It was the year 2019 which marked the increasing interest in SPACs. With an investment of around 13 billion dollars, 59 SPACs rose to the fore. In 2020 the invested amount reached nearly 80 billion dollars as the number of Special Purpose Acquisition Companies crossed the 200 mark. In 2021 the investment amount in SPACs stands at around a staggering 100 billion dollars, with a total number of companies reaching 300.
What is SPAC?
SPAC stands for “Special Purpose Acquisition Company” or a “specific purpose acquisition company.” It’s a company raised with the sole purpose of acquiring capital on the stock market. While SPAC is pushed forward as a company, it does not have any assets or activities. The company in question is therefore qualified as an “empty shell.”
Therefore, the sole purpose of these empty shell companies is an acquisition or merger with the money raised through their IPO. After enough funds are raised, the SPAC must proceed with the merger or acquisition. The process usually involves a reverse merger where SPAC, a public company, takes on a private company. If the SPAC fails to complete the acquisition within two years, the funds invested will be returned to the investors.
Advantages of a SPAC?
SPAC offers several advantages to businesses and investors. For starters, it allows unlisted companies to go public without going through the tedious process of IPO. When the company comes into the public domain, it already enjoys a good valuation. With fundraising through the stock exchanges, it quickly fills its cash reserve. It allows the SPCS to act swiftly in case of a merger or acquisition opportunity. When investors pump funds in a SPAC, they carry private equity transactions via the stock exchange. This allows them to benefit from the guarantees offered by listed public companies. Finally, selling to a SPAC allows 20% more margin than private equity transactions. Therefore there is a win-win situation for the investors and business owners.
Disadvantages of SPAC
Investing in a SPAC is like buying a promise, with all the uncertainties it entails. Newfound interest, favourable investment climate and the fact that the biggest IPOs of the previous year took place well beyond the target price pushed the popularity of SPACs to the skies. Private equity funds visualise it as an instrument of raising quick funds from investors hungry for easy profits. Therefore, the responsibility of going through background checks lies with the investors to ensure that the SPAC is really driven by a goal and does not have a sole objective of filling the founder’s pockets. The apparent lack of visibility of the future acquisitions implies that SPAC, above everything, is a promise. Therefore, the bet is not without risks, and the promise could be as empty as the ’empty shell’ that SPAC denotes.