SPACs (Special Purpose Acquisition Companies) are an increasingly popular way for companies to go public, with a surge in popularity that has made them one of the most talked-about investment vehicles on Wall Street, providing a unique alternative to traditional IPOs (IPOs). Here’s a look at the mechanics of a SPAC transaction and how it works.
What’s a SPAC?
A special purpose acquisition company (SPAC) is a “blank check” company without commercial operations. It is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company.
The mechanics of a SPAC transaction
The stages of a Special Purpose Acquisition Company (SPAC) can generally be broken down into the following steps:
- Formation: The SPAC is formed by a group of investors or industry professionals who serve as the management team. They raise capital through an initial public offering (IPO) and use that capital to search for a suitable acquisition target. SPAC founders may have an acquisition target in mind, but they cannot identify that target during the IPO process due to requirements by law.
- IPO: The SPAC goes public through an IPO and raises funds from investors. The funds are typically held in a trust account until a suitable acquisition target is identified.
- Target identification: Once the SPAC has raised the necessary funds, it is then required to identify a suitable acquisition target that fits its investment criteria within a certain timeframe, typically around two years with a hard stop at three years. This can involve researching potential targets, reaching out to companies, or working with investment banks and advisors.
- Negotiation: Once a suitable target has been identified, the SPAC’s management team enters into negotiations with the target company to determine the terms of the merger. This can involve negotiating the purchase price, the structure of the deal, and other key terms.
- Shareholder approval: If the target company agrees to the terms of the merger, the SPAC’s management team will seek shareholder approval for the transaction. The shareholders will then vote on whether to approve the merger by a certain threshold, and if it’s approved, the transaction will be completed.
- Merger: Once the merger agreement has been approved, the SPAC completes the merger with the target company. The target company becomes a publicly traded company through the SPAC, and the SPAC’s investors become shareholders of the merged company.
- Post-merger: After the merger is complete, the merged company will continue to operate as a publicly traded company. The newly merged company can then use the proceeds from the IPO to invest in its business and fuel growth. The SPAC’s management team may continue to play a role in the company’s operations, or they may step back and let the company’s existing management team take over.
Not all SPACs are successful in finding a suitable target and completing a merger. If a SPAC fails to identify a suitable acquisition target within the specified timeframe, typically around two years, the SPAC will be forced to liquidate and return the funds raised in the IPO to its investors. In this scenario, the investors may receive less than the original amount they invested, as the SPAC may have incurred various expenses related to identifying a target company and conducting due diligence. In addition, if a SPAC identifies a target company but the merger agreement is not approved by shareholders, the SPAC will also be forced to liquidate and return the funds raised in the IPO to its investors.
It’s worth noting that the timeline for a SPAC can vary widely depending on several factors, including the size of the SPAC, the investment criteria, and the availability of suitable acquisition targets.
In summary, the mechanics of a SPAC transaction involves a shell company raising funds through an IPO to acquire an existing company or business. Once the acquisition target has been identified and approved by shareholders, the transaction is completed, and the target company becomes a publicly traded company through the SPAC. While SPAC transactions can offer certain benefits, investors should be aware of the unique risks and complexities associated with these types of investments.
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