What is SPAC and an introduction to the SPAC listing process
The most popular listing financing method in the US stock market in 2020 should be a SPAC listing. SPAC's IPO financing amount accounted for 55% of the total amount of financing for all US IPOs last year. From large buyer agencies Blackstone and Fidelity to large Wall Street investment bank Goldman Sachs Damo, they are all extremely active in the SPAC market. In the SPAC boom, there are also many excellent Chinese companies listed. For example, the shared office space Youke Factory successfully quickly listed on the NASDAQ exchange through SPAC. Many people have misconceptions about the advantages and disadvantages of SPAC listing. In response to these questions, this article will introduce you to the main steps of SPAC listing, as well as the advantages and disadvantages of SPAC listing compared to traditional IPO listings.
1. What is SPAC?
SPAC is an abbreviation for special purpose acquisition company (special purpose acquisition company). As required by SPAC, the company is a company with no commercial operation, and it was formed strictly to raise capital through an initial public offering (IPO) to acquire an existing company. As a result, SPACs, also known as “blank check companies,” have been around for decades. They have grown in popularity in recent years, attracted big name underwriters and investors, and raised a record amount of IPO capital in 2020. In 2020, more than 80 SPAC companies were listed in the US, raising about $82.1 billion in capital.
(SPAC's financing scale in the past ten years exceeded US$82 billion in 2020, data source: Dealogic)
II. The principles of SPAC
SPAC management acquired another company by setting up a special purpose acquisition company and raising capital through an initial public offering. At the time of the initial public offering (IPO), the SPAC had no existing business operations or even a clear acquisition target. SPAC investors range from large US mutual funds, well-known private equity funds, insurance companies to ordinary retail investors. SPACs take one to two years to complete the acquisition, or else the funds must be returned to investors.
SPACs are generally comprised of investors or sponsors with expertise in a particular industry or business sector to seek deals in that area. When creating the SPAC, the founders sometimes had at least one acquisition target in mind, but they didn't set that goal to avoid extensive disclosure during the IPO process. That's why they're called the “Blank Check Company.” IPO investors don't know what company they'll end up investing in. The funds raised by SPC in its initial public offering were placed in an interest-bearing trust account. These funds cannot be disbursed unless the acquisition is completed or the funds are returned to investors if the SPAC is liquidated. SPACs usually take two years to complete transactions or face liquidation. In some cases, a portion of interest earned from a trust can be used as risk capital for SPAC. Following an acquisition, SPAC is usually listed on a major stock exchange. The data shows that more than 200 SPAC companies have been established in the US in the past ten years, and two have not completed mergers and acquisitions and entered the liquidation process. As a result, SPAC completed mergers and acquisitions, accounting for about 99% of cases where the company went public and achieved normal operation.
SPAC management generally does not receive wages. In the process of managing SPACs for one to two years, management's remuneration comes from reward sweat equity (Sweat Equity) after successful SPAC mergers and acquisitions. Therefore, the interests of management and shareholders are highly consistent, and only through mergers and acquisitions can there be benefits. Since SPAC's sponsors and management generally receive about 20% of the new company's shares after mergers and acquisitions, this incentive mechanism is very similar to 20% performance sharing for hedge funds or PE funds. Many people on Wall Street think SPAC can be understood as a hedge fund 2.0 upgrade.
3. Advantages of SPAC
Due to the global zero-interest financial market, bond investors' investment targets are extremely limited. After the COVID-19 outbreak in 2020, the Federal Reserve quickly cut interest rates to zero. This is one of the core reasons that contributed to the development of SPAC. For SPAC investors, if they are not satisfied with the subject of the merger and acquisition, they can choose to redeem the funds. The proceeds obtained are interest income from the funds in the SPAC trust account to purchase US Treasury bonds.
For shareholders of companies that are the target of mergers and acquisitions, SPACs are a very good way to go public. First, compared to a typical private equity transaction, the sale price to SPAC is around 20% of the estimated market value of the listing. Being acquired by SPAC can also provide business owners with a quick IPO process under the guidance of experienced partners without worrying too much about fluctuations in the large-cap stock market. Second, the audit and compliance costs of SPAC listings are far lower than the costs of traditional IPOs. Third, in the past few years, when many high-quality companies went public through traditional IPOs, the pricing was too low, and shareholders “left a large amount of revenue on the table.” For example, the stock price of Snowball Cloud Computing Company in 2020 rose 110% on the first day through a traditional IPO, and the stock price more than tripled more than a month after listing. If the company went public through SPAC, the original shareholders wouldn't have sold the original shares at such a low price.
Due to these advantages, SPACs have become more common in recent years, and their IPO funding reached a record $13.6 billion in 2019, more than four times the $3.2 billion raised in 2016. The amount of SPAC financing increased more than fivefold in 2020 compared to 2019. The industry has also attracted the participation of major investment bank underwriters such as Goldman Sachs, Morgan Stanley, Credit Suisse, and Deutsche Bank, large law firms, accounting firms, top hedge funds, and mutual fund companies.
IV. Some success stories of the SPAC industry in recent years
There have been many very successful SPAC mergers and acquisitions in the last two years. Since SPAC is relatively more focused on corporate growth, healthcare, electric vehicles, fintech, internet, etc. are the main mergers and acquisitions of SPACs. In the healthcare industry I am concerned about, healthcare provider Cano Health (Cano Health) announced in November 2020 that it will be merged and acquired by Jaws (Jaws) SPAC. The merger and acquisition deal is worth $4.4 billion. Jaw SPAC is backed by New York-based real estate investor Barry Sternlicht (Barry Sternlicht). Steinlicht is the co-founder, chairman and CEO of Starhouse Capital Group, an investment fund with over $60 billion in assets under management. He is also the chairman of Starwood Real Estate Trust. As part of the deal, Kano Health received an investment of $800 million from investors including Sternlicht and Fidelity (Fidelity), BlackRock (BlackRock) hedge funds New York Third Point (Third Point), and Dallas Maverick Capital.
One example of a highly profitable SPAC transaction in 2020 was Diamond Eagle SPAC's acquisition of draft network DraftKings. This is the fifth SPAC company formed by entertainment industry veteran Jeff Sagansky. It was listed on NASDAQ after the merger and acquisition in April 2020, with a market capitalization of over $3 billion. The company's stock price increased nearly fivefold after the merger and acquisition was completed. The SPAC company initially raised $350 million in May 2019 and listed DEACU shares, which consists of shares and 1/3 warrants. Sagansky's two previous SPACs acquired Texas-based specialty rental lodging provider Target Hotels and mobile office leasing company WillScott Corp. Investors in the deal include established US mutual fund companies such as Wellington and Franklin Templeton, who invested more than 300 million US dollars. DraftKings sports online betting platform has more than 5 million user accounts. Especially after the COVID-19 outbreak, a large number of American sports enthusiasts watched sports games at home, and the online gaming business grew extremely rapidly.
In 2020, Bill Ackman (Bill Ackman), founder of Pershing Square Capital Management, sponsored his own SPAC — Pershing Square, the largest SPAC ever, which raised $4 billion in its offering on July 22. Others include Richard Branson's Virgin Galactic, who is involved in space travel. Facebook venture capitalist Chamas Palihapitia's SPAC Social Capital Herdo Sophia Holdings bought 49% of Virgin Galactic's shares for $800 million before going public in 2019. Palihapitia has registered 26 SPAC companies and is a serial entrepreneur and acquirer in the SPAC industry.
(US electric vehicle startup Fisker went public through SPAC in 2020, photo source: Wall Street Journal)
The fintech sector is also an industry that has generated a large number of SPAC deals. For example, Repay, an excellent startup with vertically integrated payment solutions in the US, was acquired by Thunderbridge SPAC in January 2019. The acquisition price at the time was $653 million. The company's current market value has exceeded 1.9 billion US dollars, and investors' returns more than tripled in about two years after the merger and acquisition.
Of course, there are also cases of traditional financial institutions being merged and acquired by SPACs. For example, at the end of December 2020, the famous American boutique investment bank Perella Weinberg (Perella Weinberg) announced that it had been acquired by FTIV SPAC, with a transaction value of about US$975 million.
There were also some successful cases of Chinese securities companies listed through SPAC in 2020. At the end of November, the world's first shared office listed company, Uke Factory from China, was listed on the NASDAQ exchange to ring the bell. The market value of the company's mergers and acquisitions was $770 million. It can be said that the successful merger and acquisition listing has also helped China Securities to open up a new path to enter the US capital market in the future. After becoming the only listed company in the shared office sector in the world at present, Uke Factory can use more resources, advanced technology, brand awareness and professional operating capabilities to bring more development opportunities and value to shareholders.
5. Introduction to the SPAC listing process
The listing and merger and acquisition process of SPAC companies can be broken down according to the following steps of participating institutions:
1. Management
First, a SPAC company needs to have a management team, including a board of directors, to draft the company's articles of association and carry out company registration matters. Executive directors of the board generally include the chairman, CEO, chief financial officer, and several independent directors. These people need to have good experience and background, have a certain degree of credibility, and pass compliance investigations by regulatory authorities.
2. Patrons
The operation of a SPAC company requires certain expenses, including legal, financial, auditing, travel, etc. Therefore, an agency is generally required to act as a SPAC sponsor to provide these initial expenses. Public fund companies, private equity funds, hedge funds, professional groups, commercial banks, leading companies in the industry, etc. can all be said to be SPAC company sponsors. Generally speaking, SPAC sponsors are required to provide 5-7% of the total capital to be raised to obtain 15-20% of SPAC's shares.
3. Intermediaries
Like the traditional listing process, SPAC companies also need to sign a contract with an investment bank or several investment banks, and the investment bank team acts as the MLM agency. At the same time, SPAC also needs to hire law firms, accounting firms, and accounting firms to perform related professional services. Some SPAC companies also hire public relations firms or investor relations firms.
4. Exchanges
SPAC companies can theoretically choose to be listed on any exchange in the world. However, in terms of operation, SPAC companies generally prefer listing on the NASDAQ exchange because NASDAQ concentrates a large number of excellent companies in the technology and healthcare industries, and also has very abundant liquidity. Of course, the established New York Stock Exchange has also attracted some SPAC companies to list, and Europe and Canada have also begun experimenting with SPAC listings in recent years. In addition to listing stocks on exchanges, SPACs often provide derivatives of securities such as warrants and subscription certificates to be listed simultaneously on exchanges. The issuance of these financial instruments helps to increase the variety of trading targets in the market, and IPO investors can also obtain some additional benefits.
5. Companies subject to mergers and acquisitions
SPACs are required to disclose the industries they intend to acquire when listing. After a successful listing, SPAC management needs to touch many potential targets, conduct detailed due diligence, financial audits, and then publish a letter of intent (Letter of Intent) for the merger and acquisition. After the merger and acquisition intention was announced, SPAC shareholders voted based on financial data and company conditions. To ensure the success of mergers and acquisitions, SPAC management can simultaneously conduct PIPE (privately issued shares) financing. If the majority of SPAC's shares vote to agree to the merger, SPAC will sign a merger with the target of the merger and acquisition. Then, through the necessary procedures, DESPAC was implemented, the target company of the merger was absorbed, and the new company was listed on the exchange.
6. Summary
SPACs, as an emerging method of listing, have evolved extremely rapidly over the past few years. SPACs have the advantage of reducing listing costs, helping companies improve listing efficiency, and connect with capital markets. Of course, SPAC, like other publicly traded listed companies, has many uncertainties, including fluctuations in stock prices and changes in performance. Participation in the SPAC market requires a professional investment team and professional advice from a third-party independent service agency. As with other investment targets, investors need to be careful to avoid risky events.
