One SPAC I Have My Eye One

CapitalWatch” data-reactid=”12″>The following originally appeared on CapitalWatch

A SPAC (Special Purpose Acquisition Company), also known as a “blank check” company is similar, but not identical, to a reverse merger. Unlike reverse mergers, SPACs typically come with significant management groups and more financing. Reverse mergers, on the other hand, involve a private company buying a shell company that has no current operations but is publicly traded. While the shell becomes the surviving entity post-merger, the private company (and typically its management) become the operators.

merger with a SPAC led by the former Facebook executive Chamath Palihapitiya was one such deal. Also Nikola Corporation (NASDAQ: NKLA) and DraftKings Inc (NASDAQ: DKNG), both of which took the SPAC route to the stock exchange. Last month, famed hedge fund manager Bill Ackman and Pershing raised $4 billion in the IPO of Square Tontine Holdings, Ltd., the largest SPAC IPO to date.” data-reactid=”19″>SPACs have raised over $30 billion so far this year, up from $13 billion in all of 2019. Once a four-letter word, the SPAC is shedding its former negative connotation, thanks to the success of companies that have gone public via SPAC recently. Virgin Galactic Holdings Inc’s (NYSE: SPCE) merger with a SPAC led by the former Facebook executive Chamath Palihapitiya was one such deal. Also Nikola Corporation (NASDAQ: NKLA) and DraftKings Inc (NASDAQ: DKNG), both of which took the SPAC route to the stock exchange. Last month, famed hedge fund manager Bill Ackman and Pershing raised $4 billion in the IPO of Square Tontine Holdings, Ltd., the largest SPAC IPO to date.

TRNE) jumped 13% after it announced the planned purchase of shares of additive manufacturer Desktop Metal. You can play the SPAC first if you believe in what they are targeting, or you can wait until a big merger target is announced and play that day’s likely upward surge.

SPACs are not limited to the United States. Internationally, there were 67 SPAC offerings raising a record $23.9 billion this year. SPACs have comprised nearly 20% of the total funds raised through initial public offerings which, according to Refinitiv, hit $115.9 billion.

Most SPACs, however, are still America-based, with only six of the 67 worldwide occurring outside the U.S. 

Well, at least they seem focused.

SPACs used to offer narrow terms without much variation. However, the previously mentioned Pershing Square Tontine deal changed the game—specifically, with respect to share dilution and the exercise of warrants.

As the premier law firm Debevoise & Plimpton LLP explains: “With [The] Pershing Square Tontine [SPAC], the lack of dilution from founder shares and ability of Pershing Square to only exercise its warrants three years after acquisition at 20% premium will likely result in greater alignment between the goals of public stockholders with that of the sponsor.”

SPACs have also become a new, more efficient way to do mergers and acquisitions, insists Jeff Mortara, the head of equity capital markets origination at UBS, in a New York Times piece. SPACs may provide an opportunity for direct, discreet, and expeditious merger negotiations. 

More importantly, a merger with a SPAC enables the merger target company’s investors to gain some liquidity in their retained stake. Most SPACs have two years from the IPO date to complete the merger, which means plenty of time and liquidity while the deal details are ironed out.

A new type of direct listing was approved by the SEC which will enable companies to concurrently raise money while going public. This is a big deal and brought on by the increase in SPACs, still a back-door way to go public the SEC views with anxiety; anxiety born no doubt from the nightmarish reverse merger scams of the late 90s.