What are SPACs and why are they becoming popular?

Still trying to figure out what a SPAC is? Let’s go over the ins and outs.

Businesses exist in different forms today. Sometimes, a person might need more resources to set up a business. In this case, such a person looks for other means to set the business up and keep it running.

Also, many business owners look for alternatives to raise funds when they have limited capital. They also get alternatives for setting up the company, which could be a merger. To help you understand one of the ways to receive the necessary aid to run a business,  we will discuss what SPAC is. We’ll also touch on SPAC’s advantages, disadvantages, popularity, and future.

What is a SPAC?

A SPAC (special purpose acquisition company) is a new company with no commercial records. It is formed to raise capital from investors before going public and acquiring or merging with an existing company. It is also called a blank check company.

As a blank check company, it is still in the development stage. Hence, it has no business plan. Instead, it has a monetary obligation to fulfill. A SPAC has to raise funds before it merges with or acquires another company. 

SPAC founders are often investors or management-focused persons. These people have the mindset also to adopt the business models of the future company they will acquire or merge with. Likewise, they use their experiences with fiscal matters and management to select the right businesses to connect with. Unfortunately, these businesses often need more funds and required leadership skills. Examples of SPACs are Vertiv Holdings, Tuscan Holding Corp., etc. 

SPAC Advantages 

Going public through a SPAC only takes two to three months. This means blank check companies can enter the business space without delay. This is contrary to an IPO (initial public offering) process, which might take up to 12 to 18 months. 

Moreover, SPACs allow existing business owners to flex their negotiation skills. This is not just for show-offs. Instead, it is to help them charge a SPAC what they are worth, mainly because of the limited time the existing business has to wrap up. Whether in the case of a merger or acquisition, owners of existing companies do not have to worry about management, market visibility, or business growth. This is because the SPAC sponsors and investors often have adequate experience and expertise to introduce a company to a public market. 

Additionally, SPACs relieve companies of any funding-related issues they might have. Another reason investors might also prefer a SPAC merger is because the rules are less harsh.

SPAC Disadvantages

Even though SPACs bring about quick market penetration, there is still the issue of time constraints. Time constraints come into play when SPAC sponsors have to search for the right company to acquire within two years. If SPAC sponsors can’t find a suitable company within this timeframe, they must return the generated funds to the investors. However, SPAC sponsors might acquire any available company to avoid this situation. These companies, in some cases, might fall outside the acquisition or merging choice of the investors. 

At times, a company ready for acquisition or merging might only do so because they need capital badly. For example, they might want to settle debts or need desperate help to escape a messy situation. Ultimately, this will only benefit the target company, not the SPAC sponsors or investors. 

Furthermore, founders wield a lot of power when it involves SPACs. This is because investors count on them to make the right business connections, close a deal, and bring a target company to the market. Also, SPACs might outgrow the number of existing companies. Imagine if there were 50 SPACs and two companies. It would be impossible for 50 SPACs to acquire two companies. This situation can then cause the SPAC trend to become unpopular after a while.

When investors withdraw their investments, sponsors might turn to the PIPE (private investment in public equity) deal. The PIPE deal lets sponsors sell stocks at lower prices to raise capital within a short time. 

SPAC Popularity

SPACs did not creep into our economy today. It’s been around since a long time ago – the 90s. However, investors only started getting interested in 2019. At the time, a popular SPAC venture, Virgin Galactic, came into existence. In 2020, SPACs raised $83.4 billion, and $100 billion in 2021.

One of the significant reasons SPACs are now popular is their advantages over IPO. A SPAC can take two to three months to launch, while an IPO would take longer. The COVID-19 pandemic also pushed business owners to think of SPAC mergers because of how things turned. These businesses lacked capital and needed to enter the public market. 

Also, sponsors make 20% of SPAC shares. This is enough reason for its popularity. The 20% percentage cannot be overlooked even if the acquired company does not make enough capital after it begins operation.  

The Future of SPAC

Even though SPACs are now the new way to handle a merger and acquisition, many people want to opt for IPOs. Regarding opting out of SPACs, Forbes terminated its business combination agreement with Magnum Opus Acquisition Limited, a SPAC, on June 1, 2022.

However, if people stick to SPACs, they will enter the market quickly, gain liquidity, and help them negotiate directly. As good as this sounds, big companies seek the IPO option instead of a SPAC. An example is when Airbnb rejected $4 billion SPAC from Bill Ackman. Instead, it entered the public market through IPO in 2020. SPACs are expensive for businesses that are ready to go public. Yet, it is safer as it will always take away the many uncertainties of an IPO. 

In March 2022, plans existed to regulate SPACs. As of 2022, foreign companies that went public through SPACs became lower when compared to U.S companies. In Asia, SPACs are yet to become popular. Only a few stock exchanges use SPACs. In Europe, SPACs follow a more thorough regulation. However, Singapore is just starting to adopt SPACs.  

Companies that want to enter the public market through SPACs will increase as time passes. It does not matter if some want to use the IPO. At that time, sponsors would have to compete with available companies. 

In summary, SPACs are great options for companies that need help to launch. Companies willing to enter the public market through SPACs can do so without delay. This shows that SPACs take away a lot of burdens from target companies’ shoulders, especially capital-related ones. If you are struggling to raise the capital your business needs, we can help you. Our process is free, easy, and has no hidden charges. Request capital or schedule a call with Intrepid today.