• UCD Student Managed Fund

The Life of a SPAC

Updated: Feb 22

Bill Fallon, Junior Macro Analyst at University College Dublin Student Managed Fund

A Special Purpose Acquisition Company, more widely known as a SPAC, is an investment tool that has been gaining more and more popularity recently. A SPAC is a blank cheque company, which means that it has indicated that the company’s only business plan is to acquire another company and, in the case of SPACs, take it public. Most notably, the DNA company 23andMe went public through SPAC merger with VA Acquisition Corporation, raising them about $984 million in cash.

A company could choose to merge with a SPAC for a variety of reasons: it’s easier and quicker to become a public company, it raises more money, and it provides the opportunity for flexible control and ownership after going public. According to the Financial Times, SPACs raised about $78.7 billion off of 250 IPOs in 2020. In 2019, SPACs only raised about $15 billion while a decade ago they raised less than $2 billion.

With the huge rise in popularity of SPACs, it is important for the everyday investor to understand the workings of one. Compared to most investment types, SPACs have a very short lifespan. A SPAC has four stops on its life cycle: Formation, Initial Public Offering, Acquisition of Company, and Closure.

The first stop for a SPAC is Formation. As the name states, the overseeing founders form the company, bringing with them their cash and expertise. Typically, SPACs are made by repeat founders with the likes of billionaires Richard Branson, Chamath Palihapitiya, and Bill Ackman all utilizing this form of investment. Likewise, they raise money from outside investors who want to get in on the ground floor. In this stage, the founders typically figure out which sector or industry they will focus their buying efforts on.

The second stage along a SPACs lifecycle is the Initial Public Offering, or IPO, stage. Going public will help the entity raise even more capital, which is much needed in order to buy other companies. SPACs don’t only IPO just to raise money, though. The main reason for the IPO is that, for the whole scheme to work, the SPAC must be public so that once it acquires the offered company, the new entity will immediately be publicly traded, without all the hassle of normal IPOs. The size of a SPAC at this point can range anywhere from $10 million to $1 billion.

The third, and arguably most import, stage of the cycle is Acquisition. This stage has multiple steps. The SPAC must start out by finding a company that they want to acquire, typically within their given industry. According to their own bylaws and prospectus lined out in the IPO, SPACs have a certain amount of time in which they need to buy a company. Usually, that is 24 months. Once the 24 months is up, the SPAC must do one of three things. If they haven’t acquired a company by the “expiration date”, they can ask their shareholders for more time. This is done by a vote and shareholders are often enticed with more equity to grant the SPAC more time. They could also refund their investors’ money, which is typically done if the vote does not go through. Lastly, if they have found a suitable target company to acquire, the shareholders will vote on if the deal should pass.

One trend that is being seen recently is founders taking a percentage of the company acquired. Often, SPAC founders are not getting paid while the company is in its searching phase. To cover their own equity raised and make more of a profit, founders are now obtaining 25% of the companies they acquire, which begs the question of whether founders of SPACs are even risking anything to profit?

Once all of this is done, the SPAC reaches its fourth and final stage, closure. In this stage, the SPAC transfers its company onto the new acquisition, setting it up as public and dissolving the SPAC. If the SPAC needs more money to purchase the company, they set up what is called Private Investment in Public Equity (PIPE) Financing. Using PIPE, companies can raise more money from private, outside financiers who take a portion of the public SPAC.

Bill Fallon, Junior Macro Analyst at University College Dublin Student Managed Fund

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Understanding the SPAC Stock Life Cycle | by Edward Black

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