2020 was full of twists and turns, and the capital markets were no exception. The number of companies that went public in 2020 soared to a new record of 494. Compare this to just 242 in 2019. What drove the rise? In part, the popularity of special purpose acquisition companies (SPACs). Incredibly, SPAC transactions accounted for half of all IPOs during 2020 (FactSet 2021).
The SPAC boom may continue through 2021, as investors look for ways to deploy capital and find value in private companies. Understanding both the opportunities and the risks is crucial.
From the target company’s perspective, both a traditional IPO and a SPAC merger provide access to the public markets. But SPAC transactions can also offer other benefits.
In part, it comes down to timing. SPAC mergers can be accomplished in 3-6 months, compared to the 12-24 month timeline for a traditional IPO. For companies looking for quicker access to the markets, the SPAC can offer a shortcut.
In a traditional IPO, market volatility or missing the right pricing “window” can mean a depressed stock price. In a SPAC transaction, the stock price is negotiated in the merger agreement. This provides the company with some insulation from initial market volatility.
Partnering with a strong SPAC sponsor can mean access to an experienced management team. For many private companies, the resources and experience these sponsors bring to the table can be helpful.
While a shorter timeline to going public may be appealing, many companies struggle to be ready in that time. The traditional IPO process is often long in part because it can take private companies a year or more to prepare to be public. A SPAC merger cuts that preparation time short. Once the merger is completed, the company is a publicly listed entity like any other. It’s subject to the same rules and the same scrutiny. And the process itself—the merger—doesn’t give companies an easy way out either. SEC officials have emphasized that those filed merger documents would be reviewed in much the same way as an IPO filing.
In addition, while SPACs offer the ability to avoid some of the hefty fees from investment banks and other advisors paid in traditional IPOs, SPACs can be expensive in their own right. As part of the transaction, the SPAC sponsor typically receives a block of shares worth about 25% of the IPO proceeds. This usually translates to about 20% of the outstanding shares of the new company—perhaps a steeper cost than the company would like to “spend.”
A SPAC can also mean diluting control of the company. As part of the negotiation, the SPAC sponsor typically receives the right to appoint one or two members of the board.