Monday, February 28, 2022

Special-purpose acquisition company (SPAC)

SPACs—or Special Purpose Acquisition Companies—are publicly-traded investment vehicles that raise funds via an initial public offering (IPO) in order to complete a targeted acquisition.

SPACs have become an increasingly popular way method of going public. Rather than go through the traditional IPO market, an investor or firm uses a SPAC to raise funds to finance an acquisition within a certain time frame – and the company that is acquired is effectively taken public.

It’s been a mania in SPACs as businesses shy away from the traditional initial public offering market roiled by the coronavirus pandemic and wild volatility. In 2020, there were more than 50 SPAC offerings, raising a record $21.5 billion, up 145% from the previous year, according to Goldman.

Bill Ackman’s Pershing Square Tontine Holdings raised $4 billion to become the largest SPAC in history. Other notable SPAC acquisitions this year include Nikola and DraftKings.

A SPAC is a blank-check company formed to raise funds to finance a merger or acquisition within a certain time frame, typically two years. The target firm will be taken public through the acquisition. Goldman estimated that completed SPAC offerings currently searching for acquisitions exceeds $38 billion.

SPAC deals have become a more popular way for companies to go public in recent years. The disclosures required are simpler than those in a traditional initial public offering. Unlike in a traditional IPO, companies participating in a SPAC merger are allowed to present forward-looking projections to investors, which can help justify a lofty valuation. But there’s no guarantee that those forecasts will come true.

Goldman analyzed 56 SPACs that completed translations since the beginning of 2018 and found that in the long run, they tend to underperform the broader market and returns are all over the place.

US SPACs, IPO capital raised:
  • 2013: $1 billion
  • 2014: $2 billion
  • 2015: $4 billion
  • 2016: $3 billion
  • 2017: $11 billion
  • 2018: $9 billion
  • 2019: $13 billion
  • 2020: $83 billion
  • 2021 YTD: $23 billion as of 1/26 (less than a month)
  • Feb 19, 2021: Michael Dell, activist investor Paul Singer, Facebook Inc. co-founder Eduardo Saverin and former Xerox Corp. chief Ursula Burns all joined the blank-check parade on Friday, with at least 13 of these companies filing for U.S. IPOs to raise more than $4.5 billion.

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