SPAC (Special Purpose Acquisition Company) has emerged as a popular mechanism for going public, particularly in the United States, where many companies are leveraging this tool to raise capital and conduct public offerings. SPAC facilitates a quicker market entry, reduces costs, and minimizes risks compared to traditional IPOs. This article will explore the key features of SPAC, its advantages and disadvantages, examples of successful transactions, and the current prospects and challenges in the Russian market.
What is SPAC?
A SPAC is a company created specifically to raise capital through an initial public offering (IPO) and subsequently merge with a private company. Typically, a SPAC has no commercial operations or assets, apart from the funds raised. It acts as a "blank check" company with the aim of identifying a private company for merger.
Once capital is raised, SPAC has a limited timeframe (usually 18-24 months) to find a company for merging. If no deal is reached within this period, funds are returned to investors, and the SPAC is dissolved.
How does the process of going public through a SPAC work?
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Formation of the SPAC and capital raising
A SPAC is formed by a group of sponsors, usually consisting of experienced investors or businesspeople. The company conducts an IPO to raise capital. Investors purchasing SPAC shares anticipate a successful merger with a promising private company in the future. -
Searching for a target company for merger
After capital is raised, SPAC begins searching for a private company to merge with. The target company must meet the requirements of investors and the strategic interests of the sponsors. -
Announcement of the merger and approval of the deal
Once a suitable company is found, an announcement is made regarding the upcoming merger. SPAC investors vote in favor or against the transaction. If the merger is approved, the private company becomes public, and the shares of the combined entity start trading on the stock exchange. -
Completion of the merger and market entry
Following the merger, the company’s shares begin trading on the stock exchange. In this way, the SPAC fulfills its mission of facilitating the public market entry of the company.
Advantages of Using SPAC
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Accelerated process for going public
Merging via SPAC occurs more swiftly compared to traditional IPOs, enabling companies to expeditiously raise capital. -
Assurance of transaction valuation
SPAC offers the opportunity to negotiate the merger valuation upfront, reducing uncertainty regarding the company’s valuation. This is essential to avoid stock price fluctuations driven by market conditions. -
Reduced risks associated with going public
For companies, going public through a SPAC can be less risky as it does not require extensive marketing campaigns or roadshows typical of IPOs. -
Access to experienced sponsors and investors
SPACs are often initiated by sponsors with industry expertise, allowing private companies to leverage knowledge and connections for future growth.
Disadvantages and Risks Associated with SPAC
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High merger costs
While the public offering process may be expedited, transactions via SPAC can incur significant costs, such as sponsor payouts and legal expenses. -
Risks for investors
Investing in SPACs comes with a high degree of uncertainty, as at the time of purchasing shares, investors do not know which company will be the subject of the merger. -
Need to adhere to timelines
SPACs operate under a limited timeframe to identify a target for merger (typically 18-24 months). If no deal materializes in this period, funds are returned to investors, and the SPAC is dissolved. -
Potential volatility of shares post-merger
After the deal is completed, the company’s shares may experience high volatility, particularly if investors are uncertain about the company’s future success.
Examples of Successful SPAC Transactions
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Virgin Galactic
In 2019, Virgin Galactic, a space tourism company, went public through a merger with SPAC Social Capital Hedosophia, allowing it to raise capital for commercial space flights. -
DraftKings
In 2020, DraftKings, a sports betting company, went public via a merger with a SPAC, helping it expedite its market entry and attract additional investment. -
Nikola Corporation
Electric vehicle manufacturer Nikola also opted for a merger with SPAC VectoIQ in 2020, attracting investor attention despite subsequent challenges faced by the company.
SPAC in Russia: Prospects and Challenges
In the Russian market, SPAC has yet to gain widespread recognition, but interest in this method is growing. In 2021, plans were discussed to create SPACs targeted at Russian tech companies, and some investors and management firms expressed interest in executing such projects. However, large SPAC transactions in Russia remain rare.
The primary obstacles to the spread of SPACs in Russia include regulatory peculiarities, lower stock market liquidity, and limited experience using this instrument. Nevertheless, the international trend and interest in alternative methods for going public may foster the development of SPAC in the country.
Looking ahead, SPAC could become an attractive option for Russian companies, particularly in the tech sector, if market conditions improve and corresponding legislative changes are enacted.
SPAC has become a popular method for going public due to its flexibility, expedited process, and potential for attracting experienced sponsors. However, it is associated with certain risks and necessitates careful consideration from both companies and investors.
In the Russian market, SPAC remains a new and underutilized tool, but there is potential for its growth, especially in the tech sector. Successful international examples, such as Virgin Galactic and DraftKings, demonstrate that SPAC can be an efficient way to raise capital and achieve public listing.
