The golden days of SPAC or entering Wall Street through a side entrance.Published by: 18.03.2021 10:05:48
A record number of firms specializing in acquisitions have gone public this year. We're talking about firms that go by the acronym SPAC, for special-purpose acquisition companies. Recently, these companies have been sought after, especially by newcomers to the high-tech sector. Well-known names are involved, not only the famous investor William Ackman, but also, for example, former NBA basketball player Shaquille O'Neal and former Speaker of the US House of Representatives Paul Ryan. SPACs are an increasingly common financing vehicle for private companies interested in taking their stock to the public market. This is how, for example, British billionaire Richard Branson's Virgin Galactic went public in 2019.
Thus, almost 400 companies, referred to as SPACs, are now looking for a suitable acquisition target. They have a total of roughly $90 billion at their disposal, and in recent weeks an average of five such firms have been created every business day. Investors who buy SPAC stock generally do not know in advance what kind of company they will ultimately own through a SPAC.
If the managers of these specialty firms fail to find a takeover target by a certain deadline, which is usually two years, the SPAC is liquidated and the investors get their money back.
A review of Dealogic's data shows that SPACs raise more money and outperform traditional IPOs. These companies have raised $38.3 billion since the beginning of 2021, compared to $19.8 billion for traditional IPOs.
IPO vs SPAC
If companies are ambitious and want billions, they need to go public. The standard is a long and expensive administrative process, a merry-go-round with the SEC and convincing investment banks and bankers that your investment plan will be a jackpot, but all it needs is money. After the roadshow, if investors believe in your plans, you get a slightly bigger Risk-Reward if they buy the stock before the public offering.
Scenarios su often are that the stock price skyrockets after the opening bell, which for investors is the moment they've been waiting for, but the company will be pissed at the bankers who undercut your company and the company collects less than half the market price. That's obviously not what the company wants. That's why this SPAC opens up a side entrance to Wall Street, someone who knows the regulator well, has a good name in finance, will do it all for you. He merges your company, the name usually stays, you become chairman of the board and you're on Wall Street in two months.
Of course, the track record in this sector challenges where it can go when companies raise money from the public in such a simple way.
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