A 28-Year Old Billionaire Wins the SPAC Lottery
What is SPAC? #What animal is SPAC
The idea of a SPAC or a special purpose acquisition company has been around for quite a long time, but they’ve grown increasingly popular in the last year or so. A SPAC which is also sometimes referred to as a blank check company in the press is a corporate shell usually sponsored by a well-known investor that goes public by issuing shares and raising money from investors with a plan to find a private company or companies to buy or to merge with. The merger when it does happen takes the target company public without an initial public offering.
What should an investor know? #Why should I bother to know about it
Investors who buy the SPAC in its initial public offering, don’t know what stock they’re ultimately going to get. The shares that investors originally purchased in a spark IPO will eventually transform into shares in a real operating company, the target company, but these investors don’t initially know what company that’s going to be. They are effectively buying the target company’s IPO in advance without knowing what the target company is, or the price that will be paid.
Now, it’s worth noting that these deals are usually structured such that if the investors in the spectrum don’t like the target company, they can get their money back by just backing out of the deal before the merger closes. The appeal of this approach is not at all obvious. If you’re an investor, you’ll presumably pay more for a company that you like and understand than for a company to be named at some point in the future.
Why is it relevant for a company looking to go public? #Why should a company consider it
The SPAC is a publicly listed shell entity with cash pre-merger and post-merger, the shareholders of the original SPAC are now holding shares in the target operating company, which is now publicly listed because of the merger process. There’s less scrutiny in this process than there would be in a typical IPO for the same company worth to go public directly. Thus, there’s been some controversy with companies like Nikola, and luck and coffee. And many have argued that these companies would not have made it through the due diligence involved in a typical IPO.
If you’re a company looking to go public, the SPAC approach has several obvious disadvantages. The fees work out usually to be way higher than what a regular IPO where a bank takes a fee of between one and 7% usually closer to the 7% of the IPO funds raised SPACs typically pay investment buyings, a fee of around 5.5 percent of the money raised which is a lot like a regular IPO. The remainder of the proceeds raised in the IPO is then the funds that are used to buy the target company that it then plans to take public so the SPAC will usually also then pay another layer of investment banking fees around the merger process with the target company. In addition to that SPACs typically give their sponsor the famous investor who runs the SPAC and finds the targets to take public 20% of the shares for free, which once again, the cost of this is passed on to the target company. So SPAC fees can come to around a quarter if the money raised, which is three or four times as much as an investor would normally pay in terms of fees to participate in a regular IPO.
So why have these deals suddenly become so popular? # What is the fuss all about
Well, despite the merger one feature that might appeal to private companies that wish to go public in this economic environment. And that feature is that when you sign the merger agreement, you’re going public and you know the price, you don’t necessarily know how much money you’re raising, or how many shares you’re selling. Because the investors in the SPAC have the right to ask for their money back if they don’t like the deal. Or if the price goes up an awful lot. The SPAC shareholders can exercise their warrants and dilute you down basically buying more shares from you at this lower price. But you’ll at least raise some money at a fixed price and that is attractive now to certain types of company with a traditional IPO.
Is SPAC possible in India? # okay kaam ki baat Karo Ab
SPAC structures are not new to India and, in the past, there have been several examples of India focussed SPAC entities such as Trans-India Acquisition, Constellation Alpha Capital, Phoenix India Acquisition, etc.
· In 2015, Silver Eagle Acquisition, a SPAC acquired 30% stake in Videocon d2h for approximately USD 200 million. The transaction also involved listing Videocon d2h’s American Depository Receipts on the NASDAQ and distributing them to Silver Eagle’s shareholders and warrant holders who approved of the transaction — which was possible under the then existing regulations. Silver Eagle was subsequently dissolved.
· In 2016, Yatra Online Inc, the parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition.
In short, SPACs are not new to India. The legality around SPACs is tricky and we await the reforms to make it more feasible. Till then this piece was a small effort to shed light on the animal “SPAC”.