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Special Purpose Acquisition Company (SPAC)



Definition

A Special Purpose Acquisition Company (SPAC) is a type of investment firm that raises funds in an initial public offering (IPO) with the intent of acquiring a private company, essentially taking it public without going through the traditional IPO process. Once public, the SPAC seeks to merge with or acquire a company within a fixed period of time. SPACs are also known as “blank check companies” as investors initially do not know what business they will be investing in.

Phonetic

Special Purpose Acquisition Company (SPAC): S – /ɛs/P – /piː/A – /eɪ/C – /siː/Special – /ˈspɛʃəl/Purpose – /ˈpɜːr.pəs/Acquisition – /ˌæ.kwɪˈzɪʃ.ən/Company – /ˈkʌm.pə.ni/

Key Takeaways

Sure, here are three main things you need to know about Special Purpose Acquisition Companies (SPAC):“`

  1. Special Purpose Acquisition Companies (SPACs) are essentially “blank check” shell corporations designed to take companies public without going through the traditional IPO process.
  2. SPACs allow retail investors to invest in private equity type transactions, particularly leveraged buyouts.
  3. They raise capital through an initial public offering (IPO) with the purpose of acquiring an existing company. After the IPO, SPACs have two years to complete an acquisition or they will be liquidated and the IPO funds returned to investors.

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Importance

The Special Purpose Acquisition Company (SPAC) is significant in the business/finance sector largely due to its unique role as a non-operational firm specifically designed to raise capital through an initial public offering (IPO) for the sole purpose of acquiring an existing company. SPACs are also often referred to as “blank check companies.” Investors put their money in SPACs based on the potential of the targeted company, even if its identity isn’t known at the time of investment. This concept allows private companies a streamlined and less complicated way to go public, bypassing the typically lengthy IPO process. Therefore, SPACs have become an integral part of the financial landscape, influencing trends in investment and company growth.

Explanation

A Special Purpose Acquisition Company (SPAC) is often referred to as a “blank check company” with the main purpose to raise money through an initial public offering (IPO) in a bid to invest or buy another company. Investors put money into SPACs despite not knowing what the eventual acquisition target will be, based on their confidence in the SPAC’s management team to make a profitable acquisition. The capital raised by the IPO gets placed into a trust, where it will be held until the SPAC identifies an ideal company to purchase. SPACs are typically used by investors as a quicker route to bring a company public, as the traditional IPO process is much more time-consuming and laden with regulatory requirements. They have a specified timeframe, usually around two years, to complete a merger with a target company. If they are unable to do so within the stipulated period, the SPAC is liquidated, and the IPO funds are returned to the investors. In summary, the main purpose of a SPAC is to provide an expedient and flexible alternative for companies to go public, all while giving the SPAC’s management team a slice of ownership in the company.

Examples

1. DraftKings: This popular sports betting platform went public in 2020 through a SPAC merger with Diamond Eagle Acquisition Corp.. The SPAC had been formed specifically to merge with DraftKings and SBTech, a gaming technology company. The deal valued DraftKings at around $3.3 billion.2. Virgin Galactic: British billionaire Richard Branson’s space tourism company, Virgin Galactic, opted for a merger with Social Capital Hedosophia, a SPAC run by venture capitalist Chamath Palihapitiya, in 2019 to go public. The deal was valued at $1.5 billion.3. Nikola Corporation: In early 2020, the electric and hydrogen fuel cell vehicle manufacturer, Nikola Corporation, entered the public market via a merger with VectoIQ, a publicly traded SPAC. The merger valued Nikola Corporation at over $3 billion.

Frequently Asked Questions(FAQ)

What is a Special Purpose Acquisition Company (SPAC)?

A Special Purpose Acquisition Company (SPAC) is a type of blank-check company that is formed specifically to raise capital through an Initial Public Offering (IPO) for the purpose of acquiring an existing private company.

How does a SPAC work?

After an IPO, a SPAC identifies a private company for acquisition. If the private company agrees to the deal, it becomes publicly traded as a result, usually at a faster pace and with less regulatory oversight than in a traditional IPO.

What does blank-check company mean in regards to a SPAC?

That means that SPACs have no business operations of their own. They exist solely to raise capital and identify a target company for a merger or acquisition.

Are investments in SPACs risky?

As with any investment, there is a degree of risk involved. One of the major risks with a SPAC comes from the fact that investors often don’t know what the target company will be at the time of their investment.

What does it mean when a SPAC is ‘liquidated’?

If a SPAC fails to complete an acquisition within a specified timeframe (typically 18-24 months), the SPAC is liquidated and the funds are returned to the investors, minus any fees.

As an investor, do I have a say in the company a SPAC decides to acquire?

Typically, no. The decision to acquire a specific company is usually made by the SPAC’s management team. However, in some cases, shareholders may vote on proposed acquisitions.

Why would a private company choose to go public through a SPAC instead of a traditional IPO?

Leveraging a SPAC can allow a private company to go public more quickly and easily than the traditional IPO process. It can provide a clearer path to valuation as well as avoid some of the regulatory scrutiny and costs associated with a traditional IPO.

Are SPACs a new phenomenon?

No, SPACs have been around for several decades, but they have become significantly more popular in recent years due to their benefits over traditional IPOs. They represent a large portion of the IPO market today.

Related Finance Terms

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