SPACs are trending; approximately 200 SPACs went public in 2020, raising over $64 billion, just $3 billion shy of the $ 67 billion raised by the 194 traditional IPOs. Some major deals have resulted in huge successes for shareholders and target companies. You probably heard about the DraftKings or Virgin Galactic deals; other hugely successful deals include Opendoor and Nikola Motor Co. In all these deals, SPACs took these private companies public. They are all now listed on stock exchanges.
We have been hearing through the grapevines of many major SPACs deals set for 2021. 2021 has already proven to be a record-breaker; 250 SPACs were created in the first quarter alone. If the trend continues, we could see over 1000 SPACs by year-end.
Digital media company BuzzFeed is one of several digital media companies that could use a SPAC to go public. Even bigger deals are in play for 23andme, a DNA testing startup valued at around $4 billion. Bill Gates has holdings in $1.5 billion valued Butterfly Network, a startup that makes portable ultrasound equipment. Butterfly Network could also use a SPAC to go public this year.
What is a SPAC?
A SPAC or Special Purpose Acquisition Company is a corporation formed for two reasons. The first purpose is to raise investment capital through an initial public offering (IPO). If the IPO is successful, the SPAC lists on a stock exchange as a public company. It then seeks to fulfill its second function of merging with a private target company during a process called de-SPAC. After completing the de-SPAC, the private target company becomes a public company with a broad shareholder base.
Why are SPACs so popular?
SPACs are popular for several reasons.
Chamath Palihapitiya, Richard Branson, and The Virgin Galactic Deal
Venture Capitalist and former Facebook executive Chamath Palihapitiya initiated the SPAC renaissance in October 2019. His SPAC Social Capital Hedosophia merged with Richard Branson’s Virgin Galactic in an $800 million deal. Virgin Galactic began trading on the New York Stock Exchange under the Virgin name (SPCE). Chamath had developed a strong reputation for supporting startups to success. His company, Social Capital, focused on health care, education, and finance. Social Capital has since transitioned to tech with holdings in Tesla, SurveyMonkey, Amazon, and Slack, among several others.
Chamath, famous for his basketball affiliations with Golden State Warriors and Virgin brand magnate and marketing stuntman Branson, became the face of SPACs. They demonstrated how SPACs could produce efficiencies an IPO could not.
SPACs Offer Advantages Over Other IPOs and Direct Listings
SPACs work because investors willingly write blank checks to proven investors like Chamath without knowing what company the SPAC will merge with. The SPAC does all of the roadshow and fundraising leg work with their IPO. The interest stimulated by the roadshow and the SPAC founder’s reputation help ensure a successful listing. While companies can cut expenses with direct listings, the lack of fanfare and publicity can lead to stock under-subscription.
The SPACs IPO saves the private company time and money. The target company would have been responsible for these laborious and expensive undertakings that provide no guarantee of success. The harshness of the economic climate in the COVID-19 pandemic makes IPOs even riskier.
According to Douglas Messier of parabolicarc.com, Richard Branson replied when quizzed why he chose the SPAC option to list Virgin Galactic he replied; “ I’m impatient. The SPAC gets through all of the rigmarole of public companies. Yes, I thought, that’s great, let’s do it.”
Branson was referring to Securities and Exchange Commission (SEC) regulations that require SPACs to complete de-SPAC mergers within two years of their formation. During the negotiations, SEC rules state that money raised from the IPO must go into an escrow trust to reimburse investors.
The SEC policies set the tone for quick negotiations and reduce shareholder risk exposure. A SPAC takes a private company public six times faster than an IPO on average. Uncertainty is bad for business, making it hard to plan. SPACs capitalize companies faster, making them more agile.
Conclusion
SPACs have made money for their founders, shareholders, and private company owners. Despite the successes, many companies that have gone public through SPACs are performing below market averages.
It is difficult to gauge how much the broader, unfavorable economic conditions have affected these companies, but it is currently a buyers market. If you do dollar-cost averaging, then you will make some wins in the current conditions. Investors who take advantage of lower-priced stocks now will reap the rewards once the market rebounds. One thing is sure, SPACs are here to stay. The efficiency and cost savings they offer help startups thrive. As the new corporations grow, they create jobs, wealth, and economic growth.