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One of the latest financial trends is SPACs, or Special Purpose Acquisition Companies.
Indeed, a long name for a financial concept. Perhaps “Special Purpose Acquisition Company” is designed to distract and create confusion. In fact, not everyone is excited about this trend. Time to find out why.
Here’s the definition of the U.S. Securities and Exchange Commission (SEC):
It is a type of blank check company. And it is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.
Easy peasy, right?
Defining the terms
Perhaps we need to take a step back and clear the air of all these financial terms.
Blank check company
It’s a new business venture, like a startup. Being in their infancy, these businesses don’t have a specific plan but they are on the stock exchange. Also, their only asset is cash and limited investments. Indeed, no other asset. Often, people create them with the sole purpose of buying other companies. A recurring term associated with them is IPO, aka the initial public offering. The blank check businesses use unconventional IPO methods.
Traditionally, a public company waits to have a business plan and assets, before its IPO. Meaning, before any acquisition or merger. Instead, these blank check options simply jump in the mix, joining a private company to make it a publicly traded one. Hence, they are shell corporations.
Shell companies
If you have watched the movie The Laundromat (or any gangster movie, for that matter) you might have an idea of what these are. Simply, they don’t have any offices or employees. Just a bank account and an address, often to a financial provider. Often, its purpose is to facilitate transactions. Hence the registration in offshore financial centers, like Switzerland or Panama.
So, does this mean SPACs aren’t legit?
No, it just means that their creators have found an easier (and sometimes cheaper) way to acquire private companies. And, ultimately, to make a profit.
Why now?
This is a current and modern trend. In a sense, the pandemic helped propel it. Uncertainty dominates the stock market and acquisitions and mergers have become more volatile. The values of stocks go up and down quicker than ever, dictated by investors’ fears and hopes. Hence, putting a company in the public market isn’t as predictable as it was.
The benefits
So, some businesses have decided to postpone their IPOs and their debut in the stock market. Instead, Special Purpose Acquisition Companies offer an alternative. They are quicker than traditional IPOs, hence quicker capital in the pockets of both investors and managers.
SPACs raise cash for the IPO, so they can offer security in liquidity. For investors, too. In fact, the acquired company isn’t the only one to benefit.
You can decide to jump on the wagon of a SPAC. The raised amount foes in a separate trust account while the shell company looks for its “prey.” When it announces which business it will take public, you have the right to get your money back. Let’s say the blank check company decides to invest in a meat supplier. But you are vegetarian, so you’d rather not. In this case, you can ask for your investment back.
Examples of SPACs
It’s a trend, yet is has already generated much buzz.
DraftKings Inc
In this case, the SPAC is called Diamond Eagle Acquisition. And it merged with DraftKings to make it publicly traded. Through this, the share went up 249%. Indeed, a successful transaction.
The Singaporean Grab
Altimeter Capital is sponsoring the SPAC to merge with the all-inclusive online platform. The deal will officially be announced by the end of April 2021, but it guarantees a faster entry into the stock market.
Impossible Foods
Nothing certain yet, but rumor has it. In fact, according to Reuters, “is exploring going public through an initial public offering (IPO) in the next 12 months or a merger with a so-called special purpose acquisition company (SPAC).” Once again, this financial hack proves to be a faster and simpler route for companies.
In conclusion
As Special Purpose Acquisition Companies gain popularity, we might see more and more of these examples. They seem to be advantageous for both the stock market and investors. And for businesses wanting to take the next, big, financial step. Of course, with the permission of the Securities and Exchange Commission.
Will we soon see a change in this trend? Follow it with us at Treendly. Find all the updates here!
