足ることを知らず

Data Science, global business, management and MBA

Top > MBA > Day 149 in MIT Sloan Fellows Class 2023, M&A 13 "SPAC"

Day 149 in MIT Sloan Fellows Class 2023, M&A 13 "SPAC"

MBA MIT SFMBA finance M&A

A Special Purpose Acquisition Company (SPAC) is a type of investment vehicle that allows public market investors to participate in the initial public offering (IPO) and merger and acquisition (M&A) processes. SPACs are essentially shell companies with no commercial operations, created solely for the purpose of raising capital through an IPO and using those funds to acquire an existing private company. 

 

Players

SPAC process involves many players and high number of stakeholders makes this process complex. 

  • Sponsors: Sponsors are the individuals or entities that create the SPAC. They are typically experienced investors or management teams with a strong background in a particular industry or sector. For example, Apollo Global Management, a leading global alternative investment manager, could act as a sponsor by creating a SPAC to acquire a private company in the financial services sector. Sponsors contribute the initial capital, guide the SPAC through the IPO process, and identify potential acquisition targets.
  • Sellers: Sellers are the existing shareholders of the target company, which is the private company that the SPAC aims to acquire. They may include founders, early investors, venture capital firms, or other stakeholders who own equity in the target company.
  • Target Company: The target company is the private company that the SPAC intends to acquire. It is typically a company operating in the industry or sector specified by the SPAC sponsors. The acquisition of the target company allows it to become a publicly-traded entity without going through the traditional IPO process. An electric vehicle manufacturer like Rivian, which went public via a SPAC merger with Churchill Capital Corp IV, acted as a target company in a SPAC transaction.
  • PIPE (Private Investment in Public Equity): PIPE investors are institutional investors who provide additional capital to the SPAC through private investments. This capital is typically used to fund the acquisition of the target company or support its growth after the transaction is completed. PIPE investments are made at a pre-determined price per share, and these investors receive shares in the combined public company after the merger. Fidelity Investments and BlackRock might participate as PIPE investors, providing additional capital to a SPAC targeting a renewable energy company.
  • Trust: The trust is an interest-bearing account where the funds raised during the SPAC's IPO are held. These funds can only be used to complete an acquisition or returned to the IPO buyers if the SPAC fails to complete a business combination within the specified timeframe.Citigroup, as a trustee, could hold the funds raised in a SPAC's IPO in an interest-bearing trust account until a business combination is completed or the SPAC is liquidated.
  • IPO Buyers: IPO buyers are the public investors who purchase shares in the SPAC during its initial public offering. They provide the capital that the SPAC uses to acquire the target company. After the merger, these investors become shareholders in the combined public company. If the SPAC fails to complete a business combination within the specified timeframe, IPO buyers receive a pro-rata share of the funds held in the trust account. Many investors are hedge fund.
  • Long-term investors: Long-term investors are those who buy and hold shares in the combined public company resulting from the SPAC merger. They believe in the potential growth and value of the acquired company and expect to benefit from its long-term performance. Long-term investors may include institutional investors, mutual funds, pension funds, or individual investors. T. Rowe Price or Vanguard, as long-term investors, might hold shares in the combined public company resulting from a SPAC merger, expecting growth and long-term value creation.

 

Process

SPAC setup process: 

  1. Formation: The SPAC sponsors (typically experienced investors or management teams) form a shell company, and outline a target industry or sector for acquisitions.
  2. Fundraising: The sponsors contribute the initial capital to the SPAC, usually in exchange for founder shares, which represent a significant portion of the SPAC's equity.
  3. IPO: The SPAC goes through the IPO process, selling shares (usually at $10 per share) and raising capital from public investors. The funds raised are placed in an interest-bearing trust account.

     

     

De-SPAC Process:

  1. Acquisition target search: After the IPO, the SPAC has a limited time frame (typically 18-24 months) to identify and complete an acquisition of a private company. This is known as the "business combination."
  2. Due diligence and merger agreement: Once a target company is identified, the SPAC conducts due diligence and negotiates a merger agreement with the target company's shareholders.
  3. PIPE financing (optional): To provide additional capital for the acquisition or support the target company's growth, the SPAC may seek private investment in public equity (PIPE) financing. PIPE investors agree to invest at a pre-determined price per share and receive shares in the combined public company after the merger.
  4. Shareholder approval and closing: The SPAC's shareholders vote to approve or reject the proposed business combination. If approved, the merger is completed, and the target company becomes a public entity, with the SPAC's shareholders now owning shares in the combined company.
  5. De-listing and ticker change: After the merger is completed, the SPAC is de-listed, and the combined company begins trading under a new ticker symbol on the stock exchange.

If the SPAC fails to complete a business combination within the specified timeframe, the SPAC is liquidated, and the funds held in the trust account are returned to the IPO investors.

 

Pros/Cons

Advantages

  • Speed and simplicity: SPACs can provide a faster and more streamlined process for private companies to go public compared to the traditional IPO process, which can involve extensive regulatory hurdles, disclosures, and roadshows.
  • Price certainty: The SPAC structure allows for pre-determined valuations and deal terms, providing price certainty for both the target company and the investors.
  • Access to capital: SPACs provide private companies with access to public market capital, which can help fuel their growth and expansion plans.
  • Expertise: SPAC sponsors typically have extensive experience in the target industry and can provide valuable strategic guidance to the acquired company.

Disadvantages

  • Speed and simplicity: SPACs can provide a faster and more streamlined process for private companies to go public compared to the traditional IPO process, which can involve extensive regulatory hurdles, disclosures, and roadshows.
  • Price certainty: The SPAC structure allows for pre-determined valuations and deal terms, providing price certainty for both the target company and the investors.
  • Access to capital: SPACs provide private companies with access to public market capital, which can help fuel their growth and expansion plans.
  • Expertise: SPAC sponsors typically have extensive experience in the target industry and can provide valuable strategic guidance to the acquired company.