By CHRIS ILLING
WHILE mainstream in the US, the vehicle of a SPAC also found its way into Europe in the beginning of 2021 and changed the IPO (initial public offering) landscape.
DraftKings, Nikola and Virgin Galactic are among the big names that have set up a Special Purpose Acquisition Company (SPAC) to raise capital and list stocks for public trading on an exchange.
SPACs are known as “blank check” companies because they go public as companies without any economic activity. A SPAC company raises money to partner with or buy into a private company in the future.
The idea of a “blank check company” has been around for some time. However, since the upheavals and the resulting uncertainty in the market during the coronavirus pandemic, the instrument has become increasingly popular.
SPACs are listed companies that intend to take over another company (or several companies) at some point.
A SPAC first goes through the mandatory steps of an IPO. Hiring an underwriting bank to structure the IPO, filing an S-1 document with the Securities and Exchange Commission (SEC), and starting a roadshow to drive demand for its securities.
SPAC executives are required to explain to potential investors that the company will later use the raised capital to buy another business. SPACs often tout their management group’s experience (in running companies and/ or technical mergers and acquisitions) as part of their value proposition.
Because of their unusual structure, SPACs typically issue “stakes” instead of “shares” when they go public. The stakes are a mixture of common shares and options that entitle the holder to purchase additional shares.
After a SPAC has raised money on an IPO, the management group begins looking for suitable companies.
In the event that the target company is more expensive than the money raised from the IPO, the SPAC must team up with other investors to raise more capital or to turn to other sources of funding such as debt issuance.
If the merger or acquisition is agreed by both parties, the target company and the SPAC, the publicly traded SPAC essentially transforms into the acquired company and in many cases even takes on a new stock market ticker.
The management team will typically play an active role on the new company’s board of directors and help run the company as a publicly traded company.
The reasons for a company going public are varied and numerous. Despite their complexity, SPACs generally provide an easier way for companies to raise capital and get public.
From the perspective of a company trying to go public, the IPO roadshow can be sobering. Introducing the business model to countless investors across the country takes a lot of work. Stock pricing also depends heavily on how well the IPO roadshow goes, which means there is great uncertainty about how much capital the company can raise.
SPACs provide a single point of contact for a company to get the capital that it envisions. The company can count on stable, secure income without being subject to large price fluctuations.
Europe has lagged the US with just 12 SPAC IPOs worth $3.9bn from January to May 2021. The number of deals has tripled, while the volume raised by these transactions has multiplied almost eight times (from $496m across four SPACs in 2020 to $3.9bn across 12 SPACs in 2021)
The glut of deals in North America has led to fears about a bubble, and has even prompted the US market regulator to step in and caution retail investors against celebrity-endorsed cash shells.
The latest celebrity SPAC deal came from the ex-president, Donald Trump, himself. Since he got banned by most social media giants, he decided to launch Trump Media & Technology Group and “rival the liberal media consortium”.
Digital World Acquisition Corp, the SPAC that is taking former president Trump’s planned social media platform public, soared Friday following a massive rally in the previous session.
Trading in the stock was halted due to volatility multiple times in morning trading Friday. The SPAC, which trades under the ticker DWAC on the Nasdaq, skyrocketed 216 percent before the latest trading halt. The stock surged more than 350 percent to close last Thursday at $35.54 in explosive trading volume and volatility.
Phunware, the advertising software start-up involved with Trump’s 2020 re-election campaign, jumped in unison with DWAC. The stock last traded up 1,099 percent to $16.82 per share Friday, bringing its week-to-date rally to nearly 1,700 percent.
Investors are enthusiastic but also see many red flags when it comes to Donald Trump and his history with bankruptcies. Make sure to keep a close eye on his latest deal.