I am not sure if you are familiar with this acronym – SPACs. I have a feeling quite many people do not know what special purpose acquisition companies (SPACs) are. If you did not know this article will add to your body of knowledge. Last year I was privileged to be part of a project that involved a SPAC from Singapore. That was my first time getting to know about what a SPAC is and their significance nowadays. Knowing about SPACs will open up your eyes to wider horizons in business and entrepreneurship.
Defining A Special Purpose Acquisition Company (SPAC)
A SPAC can be defined as a company put together to raise capital to acquire or merge with another company. In principle, a SPAC tends to be a shell company. The shell company will subsequently go through an IPO. By the way, a shell company is a non-trading company established as a means to raise capital. It is usually listed on a stock exchange. No wonder why it goes through an IPO – for raising capital.
The capital to be raised will be for either of 2 purposes namely, commencing operations or attempting a takeover. In most cases, it is either to put together a startup or for mergers and acquisitions. It is a company still mostly in the early stages of development and is yet to zone in on a specific business focus. Upon the formation of a SPAC, it typically has no operations, yet.
The Inner Workings Of A SPAC
Let us explore how a SPAC works so that you get a clearer picture. The most interesting thing about SPACs is that they go through IPOs early on. A SPAC goes for an IPO with nothing i.e. no products or operations. This is unlike the norm for conventional companies where they have to operate before going for an IPO.
Putting together a SPAC starts with incorporating the company. So that includes the issuance of shares to founders. It is more or less the company registration process. Once that is done the next step is to start exploring potential targets i.e. for mergers or acquisitions. This step involves a rigorous look into the operations of a target company. It is about looking into metrics on financials and overall performance.
Once a SPAC is satisfied that a particular target company is worth the shot, it approaches it with its proposal. Do not forget that the capital raised from the IPO is what will be used if a proposal is accepted. Essentially, that capital is kept in a trust account which typically has an interest rate.
Anyways, after negotiations are done with a target company, and a deal is reached, the acquisition or merger commences. The necessary ratifications and paperwork are done. When the merger or acquisition is completed, the SPAC seizes to exist. You might be wondering how those who would have invested in the SPAC benefit.
Well, it is broadly either of two options namely, opting for shareholding or redemption of their shares. There are more intricate aspects to everything I explained here but I just wanted to be as simple as can be. By the way, the whole process from incorporation to the end of the SPAC takes an average of 5 years (though it can be more or less). Another thing to add is that the finding of targets and reaching deals is usually time-bound. For example, it is common practice that deals should be reached within 2 years of an IPO.
That is what you need to know to get a hang of what SPACs are. They are quite attractive when you look at some of their upsides. One of them is that a SPAC can raise capital faster than conventional companies. After all, the ability to raise capital without necessarily having operated is alluring.
The growing trend of SPAC is being mainly fuelled by effects that were brought about by the pandemic. You are probably aware that markets were shaken and thus became volatile. Thus companies have increasingly found it better to use the SPAC way. As in, by merging or being acquired by a SPAC.
This does not necessarily mean that SPAC is risk-proof; there is always risk involved. There are some interesting prospects for those willing to venture into this field. You can team up with some individuals and set up a SPAC and see how that goes. The Zimbabwe Stock Exchange does have a framework that accommodates SPACs. You might want to familiarize yourself with it.