A Briefing on Special Purpose Acquisition Companies
Structured to offer downside protection / upside potential
- SPACs are blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC’s initial public offering (IPO).
- More than 200 SPACs have gone public (through an IPO) in the last 10 years, all of which were structured to allow the investors the right to choose to
- a) remain a shareholder at the time of the merger/acquisition or
- b) have their shares redeemed for the pro rata amount held in the escrow (typically the amount invested or more).
- In 2007 the SPAC sector represented over 25% or the U.S. IPO market. Over $2.7 billion was raised by SPAC IPOs globally in 2013, up from $327 million in 2012, according to Thomson Reuters data.
- The basic concept: A SPAC is typically structured as a publicly-traded company with cash, a strong management team, and a time-sensitive mandate to acquire an attractive operating business.
- A recent example of a SPAC merger is Burger King, which merged with a SPAC in 2012:
From The Wall Street Journal:
From the investor’s point of view:
The decision to go public again was driven by building momentum at the restaurant chain, with the deal providing Burger King a chance to list itself without going through the time-consuming process of a traditional initial public offering, Burger King Chief Financial Officer Daniel Schwartz said Tuesday. "This route allows management to focus on running the business," Mr. Schwartz said.
- Typical SPAC terms give the investor a common share and a warrant position (both traded in the market). Investors are free to trade these securities like any other IPO.
- Most SPAC structures today hold at least 100% of the initial IPO price in escrow, invested in short term government securities. When a transaction is proposed, investors can redeem the share for the amount held in trust if not convinced of the merits of the acquisition.
- This provides upside opportunity if the acquisition is well received, but downside protection through the right to redeem the share.
- Both the share and the warrant are traded in the market so investors have the opportunity to exit the position at any time by selling.
- Upon announcement of a proposed acquisition, a proxy statement is filed with the SEC and investors can review the proposed acquisition to determine their interest in holding the position or exiting.
- Upon completion of the transaction, the escrow is distributed as proceeds and/or redemptions so if a shareholder decides to stay in the transaction the “SPAC” attributes are no longer applicable and the share may go up or down in value like any traded security.
From the acquisition target’s point of view:
- Merging with a SPAC is often a more efficient path to a public listing (as mentioned above in the quote from the management of Burger King).
- The SPAC structure is very flexible and allows for many different approaches to the financial transaction.
- The acquisition price is agreed to upfront and is not typically subject to the volatility of pricing in advance of a traditional IPO.
We view SPACs as an asset class that educated investors should consider adding to their portfolio. Over the last decade, I-Bankers Securities has served as managing underwriter on dozens of SPAC IPOs. If you would like additional information, click here to contact us and we will have one of our registered representatives review the sector with you.
It is important to note that SPACs, while being structured to offer downside protection and upside potential, require high risk tolerance and investors must be able to afford to lose their entire investment.