Recently, a new term has hit the headlines in 2021 called SPAC, which is the shortened form for Special Purpose Acquisition Companies. The news which hit the market was of ReNew Power (a renewable energy giant in India). Last year ReNew had to shelve its plan of$4 Billion US IPO amidst the COVID-19 pandemic. Fast forward to February 2021, it announced plans to de-SPAC (a term which is described later in the post) with a Goldman Sachs backed RMG Acquisition Corporation II, a NASDAQ-listed SPAC based out of New York. This marks the beginning of IPOs through SPAC in India. Another point to note is this time the company was valued at $4.4 Billion which according to industry experts could not have been possible through direct IPO.
While SPACs have been around for almost fifteen years now and are a topic of discussion in the finance fraternity, some record-breaking numbers came out last year. According to Crunchbase, in the year 2020, gross SPAC proceeds in US were a whopping $83 Billion by 248 SPACs and around $26 Billion in Jan 2021. Comparing it with the last year, which had $13.6 Billion by 59 SPACs, its 6x and with 2018 its 7.7x ($10.8 Billion).
What is a SPAC and what is de-SPACing?
In simple words SPAC is a shell company which is used in taking other companies public. But we do have a process for listing companies on stock exchanges i.e., an IPO. So why do companies go for the SPAC route?
i. While IPO is a traditional method of listing, it comes with its own set of difficulties. For starters, the whole process takes a lot of time e.g. the expected date of LIC IPO is post October 2021. Companies can go public a lot faster through the SPAC route
ii. In the IPO process, underwriters assign a price to the security according to their valuation. Lately many companies have seen a surge in the price of the stock on their market debut. CAMS share price surged 14% on their market debut day. This is the money left on the table.
De-SPACing is similar to a company merger. The only difference here is the SPAC has to obtain shareholder approval in accordance with SEC (Security Exchange Commission) rules.
Why have SPACs become so popular lately?
SPACs were created by David Nussbaum in 1993 when regulations were very stringent and these vehicles were prohibited. But now they have gained popularity and there are a few reasons for that
i. Some high-profile companies have gone through the SPAC route. This has contributed to their popularity
ii. Talented sponsor teams who are industry veterans
iii. Investment structure is “unique”. Public shareholders have downside protection. Shareholders are allowed to exit prior to the business combination, and it mitigates the risks of sponsor team selecting a poor target
Technicals of a SPAC IPO
When SPACs raise their initial IPO capital, they sell a share and warrant for $10. This warrant provides the shareholder an option to purchase extra shares after 30 days of the SPAC merger for $11.50 each.
The proceeds from the SPAC IPO are kept in a trust for about 2 years during which the SPAC must find a target. Failure to find a target will force the SPAC to return the money along with an annual average return. The merger should be approved by the shareholders. If they do not approve the merger, they can redeem the shares from the proceeds which will reduce the total proceeds.
Indian start-up space IPOs via SPAC route
Many Indian start-ups like Zomato, Grofers, Policybazaar.com are ‘planning for their IPOs in 2021 and SPAC might be a way to go about it. India has a lot of regulatory issues when it comes to listing and many start-ups a looking to get listed in foreign exchanges. Since the companies listed outside India are not considered to be listed here, they would not have to navigate through the strict norms
Is there a Bubble? Are there disadvantages of SPACs?
There might actually be a SPAC bubble. A huge credit in making SPACs so popular goes to one person – Chamath Palihapitiya and he also the person who comes to our mind when we think about a SPAC bubble. He has already launched 6 SPACs and plans to launch a lot more. This is a matter of demand and supply. What if there not as many acquisitions target as there are SPACs. Another point of concern is the time constraint. SPACs get two years to find a target acquisition which exposes them to the risk of rushing to an investment when the deadline is near. This will harm the investors. Moreover, there is no certainty that the acquisition is a profitable one. For example, Nikola, the electric truck maker, was listed through a SPAC and after the merger there were legal charges for falsifying customer base and technology.
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