What is a SPAC?

Introduction

A special purpose acquisition company, or "SPAC", is a newly formed company that goes public to raise funds so that it can enter into a merger with an existing privately held business that wants to be a public company. SPACs are also known as shell companies or blank check companies.

Once a SPAC goes public, it typically takes about a year for the SPAC's founders to identify a private company to merge with, and then another three months or so for the SPAC to complete the merger. So SPAC's typically have a life of about two years, from start to finish. Most SPAC deals actually include an "expiration date", which states that if the SPAC does not successfully complete a merger by the end of two years after the IPO, the SPAC is required to give the IPO proceeds back to shareholders.

Once the SPAC completes a merger, the target company takes over. The SPAC is renamed after the target company, and the target company's management team takes over the running of the company. The SPAC's founders sometimes remain involved in various limited capacities or as members of the Board of Directors, but often they have no role in the ongoing company. The SPAC's ticker symbol is changed to reflect the new company. So the SPAC process is all about allowing an existing business to go public, in a process that is different than the process of a company issuing its own stock in an initial public offering ("IPO").

SPACs have been around a long time but they never really were that important. In past years, there might be 10 or 15 SPACs launched per year, and maybe half of them would actually complete a merger. However, in the years 2020 and 2021, the SPAC concept really took off, as SPACs exploded in popularity. SPACs are now being launched at record rates.

Our database currently contains 593 SPACs that are traded on U.S. stock exchanges, with a total market capitalization of $167,216,282,220. So on average, a SPAC has a market capitalization of $281,983,613. Note that the real average market cap is probably around $500,000,000, as we often have SPACs in our database where we don't yet have good market cap data from our data providers. So $281,983,613 is too low of a number. See our list of all SPACs.

Our database currently contains 54 SPACs that have announced a pending merger, with a total market capitalization of $16,643,194,107. So on average, the SPACs that have announced a pending merger have a market capitalization of $308,207,298. See our list of pending SPAC mergers.

Our database currently contains 188 companies that are publicly traded that started as a SPAC, with a total market capitalization of $399,692,658,957. So on average, the companies that have completed a merger with a SPAC have a market capitalization of $2,126,024,782. These numbers only reflect companies that are still actively traded. There have been companies that have completed SPAC mergers that are not in our database because they are now no longer publicly traded because they were bought out or merged with another company. See our list of companies that completed SPAC mergers.

Note that the average market cap of a company that has completed a SPAC merger is quite a bit bigger than the average market cap of SPACs currently trading. That is partly explained by the fact that almost all SPAC mergers also involve a simultaneous purchase of stock in the target company by private investors, in what is referred to as a "PIPE" investment (private investment in public equity). The PIPE investment is often for the same, if not more, cash than the cash sitting in the SPAC's trust account. So most SPAC mergers are in fact a three way merger between the SPAC, the target company, and the PIPE investors.

Why have SPACs suddenly become important?

Good question. It isn't exactly clear why SPACs have exploded in popularity. But for whatever reasons, merging with a SPAC has suddenly become an acceptable alternative way for a privately held company to go public.

No one knows for sure, but the most common argument you hear is that privately held companies appear to favor merging with a SPAC over the IPO process for two reasons: the process seems to be quicker, and the process seems to offer more price certainty than an IPO. Traditionally, when a private company went through an IPO, the private company never really knew how the stock was going to be priced until the actual IPO date. And the stock price could fluctuate wildly when the IPO finally happened. With a SPAC merger, privately held companies seem to feel like they are more in control over their own destiny.

There also is some discussion that private companies like SPAC mergers because the disclosure rules are slightly easier/more favorable compared to the IPO process. A SPAC merger is subject to the S.E.C. disclosure rules related to a merger, which are probably somewhat looser than the rules related to an IPO. Some critics of SPACs argue that this allows SPACs to make disclosures related to future operations that wouldn't be allowed under the IPO disclosure rules.

Will the trend continue? No one knows. Can the market sustain an environment where there are 400 to 500 actively trading SPACs that are all looking for a merger target? SPAC mergers are typically small, as explained above. So perhaps there are enough small cap private companies out there to sustain this trend. During the 1980s and 1990s, there were often 7,000+ publicly traded U.S. companies. Now there are roughly 4,000 (see about the U.S. stock market for the exact number). Many people believe that during the past twenty years, venture capital funded companies have stayed privately held longer than they would have in the past. Perhaps if that trend changes, the market will be able to sustain an environment with 400 to 500 actively trading SPACs at any point in time.

About SPAC founders

SPACs are usually formed by investment bankers and venture capitalists who are confident that their reputation and experience will help them identify a profitable company to merge with. Their goal is strictly financial (to make money on the deal), because as explained above, the SPAC founders usually have very little ongoing role in the merged company. Since the SPAC is only a shell company, the founders become the selling point when sourcing funds from investors during the SPAC's IPO. The founders often hold an interest in a specific industry when starting a special purpose acquisition company, but many times SPACs are formed with the intention of merging with whatever company comes along, regardless of the interest.

The founders of the SPAC are typically rewarded with a 20% ownership stake in the outstanding shares of the SPAC after the completion of the IPO. The shares are intended to compensate the founders, who are not allowed to receive any salary or commission from the company until an acquisition transaction is completed. SPACs typically are allowed a two year period from the date of the SPAC's IPO to find a merger target and complete the merger. So the 20% ownership stake is designed to compensate the founders for the two years worth of work that it will take to complete the merger.

Many critics of SPACs are surprised at how popular SPACs have become because of the dilution associated with the 20% sponsor shares. Most SPACs go public at $10 per share, and that money is then put into a trust account to "fund" the merger down the road. But if you are a private company that is thinking about merging with a SPAC, the merger compensation you will receive is not $10 per share, but about $8.33 per share, because the private company has to give shares to the SPAC founders for free. So the private company has to view this cost as an acceptable "transaction fee" for going public.

SPACs go public by first issuing a unit

Typically, SPACs go public by issuing units, typically at $10.00 per share. Units are a type of security that are not very common and in fact are mostly issued by SPACs. A unit is a security that trades like any other security, except that it includes two or more securities that trade together in a bundle. If you are new to units, you can read our article what is a unit? SPACs typically go public by issuing a unit that consists of a common stock bundled together with a warrant to purchase additional shares of common stock. Within a few months of going public with a unit, the SPAC typically also arranges to have the common stock and the warrants start trading on their own, with their own stand alone symbols.

Our database currently contains 538 units of SPACs that are traded on U.S. stock exchanges, with a total market capitalization of $147,231,157,879. See our list of SPAC units.

Usually, the unit continues to trade publicly after the point in time when the SPAC has arranged for the common stock and warrants to trade on their own. But in a few situations, the unit will actually stop trading at that point. So at any point in time, there are 20 or so SPACs that have a common stock symbol that is trading when there is no corresponding unit for that same SPAC. There are also usually 10 or so SPACs that went public by issuing a common stock rather than a unit.

Most publicly traded warrants are related to SPACs

As described above, SPACs typically go public by issuing a unit that consists of a common stock bundled together with a warrant to purchase additional shares of common stock. Within a few months of going public with a unit, the SPAC typically also arranges to have the common stock and the warrants start trading on their own, with their own stand alone symbols. A warrant is very similar to a stock option. The holder of the warrant has the right to purchase the company's common stock at a fixed price (i.e. the exercise price) during the life of the warrant. Most warrants issued by SPACs have a five year life. If you are new to warrants, you can read our article what is a warrant?

Our database currently contains 480 warrants of SPACs that are traded on U.S. stock exchanges. See our list of warrants.

How long until they complete a merger?

After the SPAC has raised money through the IPO, the management team has 18 to 24 months to identify a target and complete a merger, and 100% of the money raised in the IPO is held in a trust account. The period may vary depending on the company and industry. In the event that the predetermined period lapses before an acquisition is completed, the SPAC is dissolved, and the IPO proceeds held in the trust account are returned to the investors. When running the SPAC, the management team is not allowed to collect salaries until the deal is completed.

When a SPAC announces a pending merger deal, SPAC shareholders typically have the right to redeem their shares prior to the merger being completed. The shareholders can surrender their shares back to the SPAC and in return receive a payment equal to the value per share of the cash sitting in the SPAC's trust account. Because the SPAC is not allowed to spend the money in the trust account on expenses, the redemption price is often close to the $10.00 per share IPO price (most SPACs happen to go public at $10.00 per share, but not all).

More about PIPE investments

When a privately held company merges with a SPAC, the merger agreement often includes additional stock sales to private investors that are referred to as "PIPE" investors (private investment in public equity). The PIPE investors are institutional investors of all different types, and they vary on every SPAC merger deal. The idea is that the privately held company wants to raise additional capital as part of the merger. Remember, although there have been a few large SPACs that have raised over a billion dollars, most SPAC IPOs are between $200 to $500 million. So most SPAC mergers include PIPE investments.

The PIPE investors are often related to the SPAC's founders. In fact, some SPAC structures now include a guarantee from the SPAC founders as part of the SPAC IPO that when a deal comes along, the SPAC's founders will promise to put in additional money in the form of a PIPE investment.

When a SPAC merger deal is announced, it is important to read the terms of the deal so that you can understand the ownership split between the original owners of the privately held company, the PIPE investors, and the shareholders of the SPAC. It is not uncommon for the PIPE investors to put in as much or more capital than the SPAC, so the SPAC shareholders may actually end up with the smallest share of the merged entity (after the original owners of the privately held company and the PIPE investors).

It is also important to understand what the PIPE investment price per share is going to be. Many SPAC mergers in 2020 and 2021 included PIPE investments priced at $10.00 per share. These deals often created an unusual situation where the SPAC's common stock was trading at a market price significantly higher than book value ($10.00 per share), at the same time that a PIPE investment was about to be made at $10.00 per share. Is it logical for a SPAC's common stock to trade at $18.00 per share when a merger is about to happen that has a PIPE investment priced at $10.00 per share? That situation happened on SPAC deals all the time in 2020 and 2021.

Buyer Beware

There are generally two types of investors buying SPACs: short-term traders and long-term investors. There are tons of short-term traders who buy the units/common stock when a SPAC first goes public, and then hope to make money if the unit/stock bounces when a merger deal is announced. Or they hope to make money if the stock bounces when the merger deal is completed. But it is unclear how much of the trading in SPACs actually consists of long-term investors who are interested in the target company, once a merger deal has been announced.

Many of the SPAC merger targets are essentially start-ups in new industries or start-ups with new business models. Most are not currently profitable. So trying to predict whether a SPAC merger target will actually be a successful long-term investment is usually very difficult. Many of these SPAC merger companies will probably fail in the long-run. But undoubtedly there will probably be a few wild successes. So SPAC investing appears to be somewhat akin to venture capital investing, where you have to hope that your profits from the one wild success will offset your losses on five other SPAC investments.


All data is a live query from our database. The wording was last updated: 03/13/2021.

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