SPACs, or special purpose acquisition companies, seem to be everywhere these days, overtaking more traditional liquidity options like M&A and IPOs. But what are they, and what do they mean for investors and shareholders? Should your business be involved? Are we in a SPAC bubble or are they here to stay? SRS Acquiom is seeing a rise in SPAC activity and reverse-merger deals. Our data reveals emerging trends for early and late-stage companies, SPAC sponsors, and capital markets investors. Read on to learn more about SPACs, the trends SRS Acquiom is seeing, and what they could mean for your next M&A deal.
What is a Special Purpose Acquisition Company? (SPAC)
A SPAC is a special purpose acquisition company, a shell company with no commercial operations that raises money through an initial public offering (IPO) to eventually take a company public. Also known as “blank check” companies, SPACs are usually created or sponsored by corporate executives, private equity firms, or hedge funds.
Mechanically, SPAC IPOs are usually priced at $10 a share and the money goes into an interest-bearing trust account until SPAC management identifies a company with which to merge. Shareholders in the SPAC vote to approve a proposed merger, and investors can either swap their SPAC shares for shares of the combined company or redeem them for their original investment plus interest in cash. SPAC sponsors usually have a 24-month window to execute a deal, or the SPAC is liquidated, and money is returned to investors.
At the time the SPAC raises money, investors in the IPO don’t know what the eventual acquisition target will be and may have only vague guidance as to the industry of interest. SPACs sponsors aren’t allowed to choose their targets ahead of time. Investors are therefore looking for a track record of success from the SPAC’s sponsors and leadership.
As a result, early pioneers of the current SPAC boom are successfully raising their fourth, fifth, even sixth SPAC and planning for many more. For example, Chamath Palihapitiya, a former Facebook executive and venture capitalist, has taken six SPACs through the IPO process so far and has filed to launch seven more. Palihapitiya started with the ticker symbol IPOA and disclosed last year that he has reserved through IPOZ. Alec Gores, a private equity investor and another early SPAC investor, is on Gores Holdings VIII, his eighth blank-check company.
Special Purpose Acquisition Company Statistics
SPACs have existed since the early 1990s but gained in popularity only recently. The ten-year period from 2009 to 2019 saw 226 total SPAC listings come to market, according to SPAC Insider. Additionally, 2020 alone saw 223 in a single year, and in just the first two months of 2021 saw 204 SPAC transactions.
According to Refinitiv Deals Intelligence, 50 de-SPAC1 acquisitions were announced in February 2021 representing $108.6 billion in deal value, records by both measures. Year-to-date volumes have already surpassed last year’s total.
SPAC listings are getting bigger and targeting larger companies, according to SPAC Insider: from an average valuation of $800 million last decade, to $1.7 billion last year, and $2.9 billion year to date 2021. Just last month, the largest SPAC transaction was announced: Lucid Motors, an electric vehicle (EV) manufacturer, for $24 billion.
SRS Acquiom Experience with SPACs
SRS Acquiom has worked on more than a dozen recent SPAC and reverse merger deals. While a relatively small sample size, some trends are clear:
1. Triple-Track Exit Strategies
Successful, late-stage private companies have long had the option to pursue a sale or an IPO, what is called a dual-track exit. With SPACs as another buyer class, companies now have a triple-track exit (M&A, IPO, and SPAC).
2. Quicker Path to IPO
Smaller or earlier-stage companies, by comparison, may be too early to go through a traditional IPO process. For them, a SPAC may be an alternative to traditional venture capital or growth equity funding. We can see this in the rise of $0 revenue companies (the highest level since the dot-com bust). Underscoring this point, Kim Brady, CFO of Nikola Corporation stated: “We chose the SPAC route because there was simply too much uncertainty in the market with the coronavirus…If we had pursued the IPO path, we would not be a public company at this point.”
3. Access to Capital
Lastly, some industries are unable to access traditional capital markets. We’ve seen a number of cannabis companies go public through the de-SPAC process.
SPAC Deal Terms and Comparison to the SRS Acquiom M&A Deal Terms Study
Our experience with SPACs also supports the consensus that SPAC transactions are extremely seller friendly. The SRS Acquiom 2020 M&A Deal Terms Study suggests that the vast majority of private-target acquisitions have a purchase price adjustment (PPA) mechanism, rising to 90% of deals. Similarly, around 80% of deals have seller-indemnification provisions and escrows, and 25% referenced representations and warranties insurance (RWI).2
By comparison, according to the 2020 De-SPAC Debrief, only 28% of de-SPAC transactions had a purchase price adjustment mechanism. Similarly, only 28% had indemnity escrows (at a median of 12 months). Further, just 30% had seller indemnification provisions and Survival of Reps and Warranties, and 16% referenced RWI.
The Changing Landscape for Private Equity
SRS Acquiom observes from its own pipeline that private equity (PE) firms are competing with SPACs for some deals, even as they cooperate on others. PE firms have long been the most frequent SPAC sponsors, and that has held true even as the strategy has exploded in popularity over the past 18 months. On the buyside, PE firms are competing with SPACs for target company investments, adding another prospective buyer to the mix (and one with tantalizing speed and economics). On the sell side, we’re frequently seeing PE firms exit their investments through SPAC transactions. This is likely to continue as SPAC IPOs outpace traditional IPOs, and SPAC deals are viewed as an easier way to take companies to the public markets.
According to Michael Arougheti, Co-founder of Ares Management Corporation, “SPACs represent a threat to traditional private equity in some ways, but an opportunity as well. SPACs have the potential to “chip away” from the aggregate market opportunity for private equity searching for transactions, and to a lesser extent venture capital and growth equity too.”3
That said, Private Equity firms were among the first to embrace the strategy and are most deeply involved. Mergermarket reported, “69% of PE firms surveyed expect to be involved in future SPAC-related transactions, either as sponsor or target.”4
Looking Forward: 2021 and Beyond
So far into 2021, SPAC listings and de-SPAC merger activity show no sign of abating, but things could change quickly. SPACs rely on both institutional investor participation and retail enthusiasm.
Retail investors may get burned. Research suggests that in aggregate, common shareholders typically lose money in the first year post de-SPAC transaction. With strong current demand, SPAC terms have gotten less attractive for retail investors, offering fewer warrants per unit and diluting common shareholders at the expense of target investors.5
With bond yields rising institutional investors may lose interest too, especially in the most speculative, pre-revenue startups. Rising bond yields give investors alternatives to earn cash everywhere else in the market and with much less volatility.
Goldman Sachs estimates $103 billion in SPAC capital is actively looking for acquisition targets, representing more than $700 billion of potential enterprise value. With more than 400 SPACs publicly listed and looking for targets and with a firm timeline of two years to do deals, we can expect the SPAC fervor to continue until at least the end of 2022. The promise of outsized returns in a zero-interest rate environment is what allowed SPACs to rise so quickly. If this base case changes, SPACs could hibernate just as fast.
SRS Acquiom has a unique perspective through our work as shareholder representative, paying, and escrow agent. We will continue to monitor the SPAC impact on the overall M&A landscape, deal term trends, and industry participants.
For the time being, SPACs are an attractive alternative to traditional IPOs and M&A and should be considered with care.
1Once a special purpose acquisition has occurred, the “de-SPAC” process begins. Lasting three to six months, this period involves the management of the M&A transaction (similar to a merger agreement).
3Michael Arougheti, Co-Founder, Director, Chief Executive Officer, and President, Ares Management Corporation (ARES) Q4 2020 Results Earnings Call
4Mergermarket is pleased to present Creative Deal Structures: Energizing the M&A Market Post-Crisis, published in association with Sidley Austin LLP