SPACs

Definition

A SPAC, or Special Purpose Acquisition Company, is a so-called shell company. A SPAC is therefore an empty shell company that was founded with the sole purpose of acquiring other (non-listed) companies and making their shares tradable on the stock exchange. This form of IPO differs from the classicIPO primarily in that the process is much faster and cheaper. In addition, SPACs offer private companies that may not yet be in a financial position to carry out a traditional IPO the opportunity to be traded quickly and easily on the stock exchange. Based on these advantages, IPOs via SPACs have become increasingly popular in recent years. In 2009, for example, there was only one IPO via SPAC, in 2020 there were already 248 and in the first quarter of 2021 even 298. The hype around SPACs is there. But how does a SPAC IPO actually work?

The process

1) Setting up the SPAC with the aim of carrying out an IPO

The first step is to set up the SPAC. This is done with the sole aim of floating it on the stock exchange and buying up private companies with the help of the shell company.

2) Carrying out the IPO & raising capital

A SPAC is usually set up by one or more sponsors. These are then the first investors in the SPAC and therefore also take over its management. Their task is to bring further investors on board and, in the next step, to find a suitable company to take over. First of all, however, a large amount of capital is raised via the stock exchange, which the SPAC can use to take over a company. However, the investors who make their capital available to the SPAC do not yet know which company the SPAC will take over when they make their investment and whether or not this will lead to a successful investment for them. The risk for investors is very high in this case, and it is particularly important to pay attention to the respective sponsor of the SPAC. If the sponsor is trustworthy and experienced, the probability of a strategically favorable investment with gains for investors is significantly higher. Once sufficient capital has been collected from investors, the sponsor invests this in a trust account at a risk-free market interest rate and the search for a suitable company to take over can begin. However, the respective sponsor of the SPAC only has a limited amount of time to do this. A suitable company must be found for takeover within two years, otherwise the SPAC must be dissolved (reversed). In this case, the investors receive their invested money back, including interest, and the initial sponsor is left empty-handed. From the sponsor's point of view, this case should therefore be avoided as far as possible.

3) Takeover of a private company

After collecting the capital and successfully finding a company to take over, the merger with the private company that the sponsor has found must now be agreed with the shareholders. If they agree, the private company can be taken over by the SPAC.

4) Merger of the private company with the SPAC

When the private company merges with the SPAC, it becomes a public company whose shares can be purchased on the stock exchange. The investors who previously invested in the SPAC now have a stake in the acquired company. The existing investors in the company are of course also involved.

5) The shares of the acquired company can now be acquired publicly on the stock exchange

Advantages and disadvantages of SPACs

Advantages:

• Quick and inexpensive way for companies to be listed on the stock exchange (IPOs are often more expensive, for example the issuing banks alone receive 6-8% of the issue volume)
• The issue price is known to the company from the outset.
• There is only one negotiating partner, namely the sponsor of the SPAC. In contrast to conventional IPOs, this simplifies the process.
• The transparency of the company takeover is higher than with an IPO, as the shareholders already have the respective figures of the company to be merged before the takeover.
• SPACs can benefit from the knowledge and expertise of the sponsors.

Disadvantages:

• If the sponsors of the SPAC sell their shares shortly after the merger, it is not possible to benefit from their expertise.
• SPAC sponsors receive a large portion of the shares, if they sell their stake after a merger, the share price may fall.
• The simple and quick listing of private companies on the stock exchange by means of SPACs can lead to start-ups that are not yet ready for an IPO being listed prematurely.
• The sponsor of a SPAC has a period of 24 months after its establishment during which it must find a suitable company to take over. If this period is coming to an end and no suitable company has yet been found, there is an increased risk that the sponsor will invest in a second-tier company simply to avoid having to dissolve the SPAC. This can be a considerable disadvantage for the investors. However, the sponsor wants to avoid having to unwind the SPAC at all costs, as this would leave him empty-handed. Particular caution is therefore required here.

How can you tell whether a SPAC is promising?

As with all other investment transactions, there is no real guarantee that a SPAC will be successful. However, it can be concluded that a particularly decisive factor in the success of a SPAC is the respective sponsor. According to a study by McKinsey, SPACs that were particularly successful were those whose sponsor was a person who had already worked in a prominent management position and therefore had a certain level of industry knowledge and expertise. Those SPACs that were only managed by investors performed significantly worse in comparison in this study. It is therefore reasonable to assume that the success of a SPAC goes hand in hand with the respective sponsor. If investors can rely on the expertise of the sponsor, investing in a shell company is definitely less risky. This is mainly due to the fact that investors do not yet know which company the SPAC will take over when they make their investment in the SPAC. Often this is not even clear to the sponsor; only a subject area is being defined. It is therefore of immense importance that investors have confidence in the sponsor of the SPAC.

SPACs in Germany

The takeover of private companies by SPACs is primarily a trend that originated in the USA and is very popular there. In recent years, however, the hype surrounding SPACS has also spread to Germany. The best-known SPACs in Germany include Germany 1, which invested 250 million euros and went public in 2008, and Helikos, which raised 200 million euros in 2010. Germany is at the forefront of the SPAC race in 2021 in particular, with Lakestar Spac I and 468 Capital going public with a SPAC in the first quarter. You can find more news on SPACs at: /tag/spac/