Special Purpose Acquisition Companies (SPACs)
What are SPACs?
A Special Purpose Acquisition Company (SPAC), also commonly known as blank check companies, is a company with no commercial operations that is formed strictly to raise money through an Initial Public Offering (IPO) for the purpose of buying another company. SPACs have seen much growth in recent years, with more than 50 SPACs in the US alone and $21.5 billion worth of IPO funds raised in the first half of 2020. SPACs have grown in popularity over the past several years as the transparency on the net asset value (NAV) and redemption rights make SPACs an attractive deal for investors with significant optionality.
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SPAC IPO Transaction Summary by Year
SPACs are sponsored by an asset management company and are usually formed in conjunction with a business executive or reputable manager. The good reputation and extensive experience of the professional executive are essential in the process of identifying a profitable company to acquire.
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The SPAC capital raising process differs from traditional IPOs with the cash raised in the IPO placed in a trust account which is not released until the SPAC completes a business combination (or upon a specified date if the SPAC fails to complete a business combination by that date). During this IPO process, SPACs will typically offer a share of common stock and a warrant to purchase additional common stock at a later date. The rationale behind the warrant is simply compensation for the tied-up capital that is held in the trust account until a suitable deal is found for the SPAC. In other words, SPAC’s unique business structure allows investors to contribute money towards a fund which typically collects interest for several years until a deal is found and used to acquire one or more businesses, identified after the IPO.
Case Study
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In July 2020, Bill Ackman launched the largest SPAC IPO in the NYSE. The SPAC, known as Pershing Square Tontine Holdings successfully completed an offering of 200 million shares at $20 per share, raising $4 billion in proceeds. In addition, Ackman has personally invested in the SPAC, pledging to invest capital of up to $3 billion with his hedge fund Pershing Square Capital Management L.P. Each share consists of: a unit of common stock, 1/9th of a redeemable warrant exercisable at $23 and contingent rights to acquire 2/9ths of a warrant exercisable at $23.00 per share provided that investors do not redeem their units prior to the business combination.
There are several unique features of this SPAC, the most dramatic being the “tontine” nature of the warrant structure. The contingent warrants are not detachable and are forfeited if the investor redeems their share. The forgone warrants are distributed pro rata to the shareholders who remain. This unique design encourages a long term investment in the SPAC, leading to greater certainty of closure for the acquisition. Another deviation from traditional SPAC’s is the lack of sponsor shares, which means the sponsor’s returns are entirely reliant on the warrants it purchased. Their compensation from sourcing, negotiating and closing an acquisition will be a 6.21% promotion only after the investors have already received a 20% return, which really emphasises their focus on investors. It is without a doubt that Bill Ackman’s reputation is shrouded with controversy. It remains to be seen if his new SPAC IPO will be added to the list.