What is SPAC?
A Special Purpose Acquisition Company (SPAC) is a type of company that is created with the sole purpose of raising funds through an initial public offering (IPO) with the intention of merging with or acquiring one or more existing businesses or assets. SPACs are often referred to as “shell” companies because they have no specific business plan or operations at the time of their IPO. Once the SPAC has raised enough funds, it will begin the process of identifying and acquiring suitable targets, which is known as the “De-SPAC” process.
Benefits of Merging with SPAC
1. Shoter Public Listing Timeline
The SPAC merger process is typically faster than the traditional IPO process. The SPAC is already a publicly listed company, so the target company can become a public company through a merger with the SPAC in a matter of months, rather than years or more than an IPO process typically takes.
2. Lower Listing Costs
The cost of going public through a SPAC merger is lower than the cost of an IPO. In IPO, the company must pay underwriting fees to investment banks and other expenses associated with the offering. In contrast, the SPAC sponsor typically paid all the listing cost including SEC Counsel fee, leaving more capital for the target company.
3. Reduced Regulatory Scrutiny
The regulatory requirements associated with an IPO can be extensive and time-consuming. A company going public through a SPAC merger may face less regulatory scrutiny, as the SPAC is already a public company that has gone through the IPO process.
4. Greater Valuation and Fundings Certainty
A SPAC merger offers companies more certainty in terms of valuation and funding compared to a traditional IPO. By merging with a SPAC, the company can negotiate terms and ensure a certain amount of funding from the SPAC’s existing pool of capital. This can provide greater financial stability for the company, whereas a traditional IPO can be more unpredictable in terms of the amount of funding raised.
5. Access to Experienced Investors
The investors who back the SPAC are often experienced and well-connected in the financial industry. This can provide the target company with access to valuable contacts, advice, and resources.
Difficulties in Merging with SPAC
1. Lack of Suitable SPAC
There may be a limited pool of suitable SPACs available for merger, particularly if the target company has specific industry or geographic requirements. This can make it difficult for the target company to identify a suitable partner that aligns with their strategic goals.
2. Competition for SPAC
The increasing popularity of SPAC mergers has led to a competitive market for SPACs, with many target companies lying for the attention of a limited number of potential partners. This can make it difficult for the target company to stand out and secure a merger partner that is a good fit.
3. Mismatch in Valuations
The target company may have difficulty finding a public shell company that values the company appropriately. If the target company’s valuation is too high or too low compared to the SPAC’s expectations, the merger may not be feasible or may require significant negotiation to reach agreement on the terms.
4. Shareholder Disagreement
When merging with a SPAC, shareholder disagreement and the risk of money withdrawal are potential challenges for the target company. Shareholders may vote against the proposed merger, which can lead to the redemption of shares for cash and a reduction of available capital.