-By Sai Asrith Pakki
Special Purpose Acquisition Companies are shell companies that raises money through an in initial public offerings with intention of merging or acquiring private company. Due to lack of commercial operations until they complete a business combination, these are also known as Blank Check Companies.
Special Purpose Acquisitions Companies have been around in various forms for decades, but during the past two years they’ve taken off in the United States. SAPCs are publicly traded corporations formed with the sole purpose of effecting a merger with a privately held business to enable it to go to public. Compared with traditional IPOs, SPACs often offer targets higher valuations, greater speed to capital, lower fees and fewer regulatory demands.
Today, most SPACs focus on companies that are disrupting consumer, technology, or biotech markets. Some of these firms have enormous capital requirements, and can provide only limited assurances on near-term revenue and viability. The lifecycle of SPAC has stages like IPO, identifying the target, merger or acquisition, post-merger which are explained below.
Working of SPACs:
Formation of SPACs involves a team of experienced investors and managers who raise money through an initial public offer. The proceeds of the IPO will be placed in a trust account and those proceeds are used for acquiring a private company.
They have a limited time period to find a target company and complete a business combination. In case they do not find target companies, SPACs will be liquidated and returned to the investors.
After finding the target companies, a merger agreement will be negotiated which contains the terms of transaction such as purchase price and exchange ratio for the target company’s shares. The approval of shareholders of both the SPAC and target company is mandatory for the merger agreement.
Once the merger agreement is approved, the SPAC and target company will merge into new publicly traded company which adopt the target company’s name and business operations.
Benefits of SPACs:
SPAC provide way to invest in private companies which is an attractive opportunity for investors and also offer low risk investment
1. Upfront Pricing - IPO are wholly dependent on market conditions which can impact the company’s overall strategy, on the other hand the price is negotiated before the transaction is closed for SPACs especially when market is uncertain.
2. Lower Marketing Costs - Capturing the investors’ attention is one of the major problems for startups. With SPACs merger this uncertainty can be bypassed which results in saving time, money on company’s marketing strategy, which is valuable.
3. Less Scrutiny - SPAC can raise debt or private equity investment in public equity funding in addition to original amount of capital raised.
4. Time Saving – Speed and efficiency, financial flexibility.
Risks of SPACs:
Not only the advantages, on the other side there are also some disadvantages of SPACs which reduces the degree of oversight from regulators and lack of disclosure from SPAC.
1. Subpar Returns - Returns from SPACs may not meet expectations offered during the promotion stage.
2. Compressed Timeline - Due to this nature SPAC transaction places burden on target company management.
3. Lack of transparency - SPACs are not required to disclose as much information as traditional IPO companies which make investors difficult to assess their risks in investing in SPAC.
4. Increased Volatility - There will be a lot of uncertainty in their performance.
Impact of SPACs on capital market:
The rise of SPAC has brought several changes in the capital market increase in the IPO activity, streamlining the IPO process, creating new investment opportunities.
Access to capital for private companies is increased, which means it helped private companies to raise the capital and go public.
Investor participation is at higher rates due to SPACs which impacts capital market in such a way that more retail investors are being participated in the IPO market.
It has created the volatility in if IPO market which means the occurrence of uncertainty in the prices of IPO.
The Securities and Exchange Commission has increased the observation and the level of examining of SPACs considering the concerns of interest and investor protection.
Overall, SPACs have created a positive impact on capital market than the negative impact. It transformed the capital market by offering more accessible path to public listing and attracting new investors in different approach methods. Their influence on the capital markets is going to be continued as long as they evolve and adapt to the market conditions and also plays key role in the coming years.
Statistical data of Special Purpose Acquisition Companies (SPAC):
In 2021, there were 613 SPACs in United States which rose $162.5 billion. This indicates the increase in the number of SPACs when compared to the previous years which were 86 SPACs. The median return is 8.6% for SPACs that have announced their merger targets and there were also 394 SPACs mergers in the United States. 83 SPAC merges were completed
in the United States in 2021and approximately 10% of the SPACs liquidate without finding the target company.
Conclusion:
SPACs offer a potentially faster and less regulated path to public markets compared to traditional IPOs. US experience shows us their foresight in SPACs where as India is facing a unique challenge in adopting this model due to unavailability of dedicated frameworks for SPACs which leads to uncertainty. This can be overcome by creating the supportive regulatory environment like introduction of new amendments by SEBI which helps in adopting SPACs.
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