A special-purpose acquisition company (SPAC) is a collective investment scheme that allows public stock market investors to invest in private equity type transactions, particularly leveraged buyouts. SPACs are shell or blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).
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SPACs were traditionally sold via an initial public offering (IPO) in $6 units consisting of one common share and two "in the money" warrants to purchase common shares at $5 a common share at a future date usually within four years of the offering. Today, SPAC offerings are more commonly sold in $8–10 units which consist of one common share and one warrant. SPACs trade as units and/or as separate common shares and warrants on the OTC Bulletin Board and/or the American Stock Exchange (both the Nasdaq and the New York Stock Exchange have announced plans to list SPACs in 2008) once the public offering has been declared effective by the U.S. Securities and Exchange Commission (SEC), distinguishing the SPAC from a blank check company formed under SEC Rule 419. Trading liquidity of the SPAC's securities provide investors with a flexible exit strategy. In addition, the public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC's performance.
By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. Today, the percentage of gross proceeds held in trust pending consummation of a business combination has increased to 98% to 100%.
The SPAC must sign a letter of intent for a merger or an acquisition within 12 to 18 months of the IPO. Otherwise it will be forced to dissolve and return the assets held in the trust to the public stockholders. However, if a letter of intent is signed within 12 to 18 months, the SPAC can close the transaction within 24 months. Today, SPACs are incorporated with 24-month limited life charters that require the SPAC to automatically dissolve should it be unsuccessful in merging with or acquiring a target prior to the second anniversary of its offering.
In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net assets at the time of acquisition and a majority of shareholders voting must approve this combination with usually no more than 20% to 40% of the shareholders voting against the acquisition and requesting their money back.
In order to allow stockholders of the SPAC to make an informed decision on whether or not they wish to approve the business combination, full disclosure of the target business, including complete audited financials for it, and terms of the proposed business combination via an SEC merger proxy statement is provided to all stockholders. All common share stockholders of the SPAC are granted voting rights at a shareholder meeting to approve or reject the proposed business combination. A number of SPACs have also been placed on the London Stock Exchange AIM exchange; these SPACs do not have the aforementioned voting thresholds.
As a result of the voting and conversion rights held by SPAC shareholders, only well-received transactions are typically approved by the shareholders. When a deal is proposed, a shareholder has three options. The shareholder can approve the transaction by voting in favor of it, elect to sell their shares in the open market, or vote against the transaction and redeem their shares for a pro-rata share of the trust account. (This is significantly different from the blind pool - blank check companies of the 1980s, which were a form of limited partnership that did not specify what investment opportunities the company plans to pursue.) The assets of the trust are only released if a business combination is approved by the voting shareholders, or a business combination is not consummated within 24 months of the initial offering. This guarantees a minimum liquidation value per share in the event that a business combination is not effected.
The SPAC is usually led by an experienced management team composed of three or more members with prior private equity, mergers and acquisitions and/or operating experience. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually held in escrow for 2–3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to between 3% to 5% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation.
No salaries, finder's fees or other cash compensation are paid to the management team prior to the business combination and the management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams agrees to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found. Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fudiciary duties. The SPAC is further prohibited from consummating a business combination with any entity which is affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders.
In July 2007, Pan-European Hotel Acquisition Company N.V. was the first SPAC offering listed on the Euronext Amsterdam exchange, raising approximately €100 million. That listing on NYSE Euronext (Amsterdam) was followed by Liberty International Acquisition Company, raising € 600 mln in January 2008. Liberty is the third largest SPAC in the world and the largest outside the U.S.A.
Emerging market focused SPACs, particularly those seeking to consummate a business combination in China, have been incorporating a 30/36 month timeline to account for the additional time that it has taken previous similar entities to successfully close their business combinations.
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Early history |
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Since the 1990s, SPACs have existed in the technology, healthcare, logistics, media, retail and telecommunications industries after boutique investment bank EarlyBirdCapital, specifically founder David Nussbaum in accompany with David Miller, managing partner of Graubard Miller lawfirm, developed the template. However since 2003, when SPACs experienced their most recent resurgence, SPAC public offerings have sprung up in a myriad of industries such as the public sector, mainly looking to consummate deals in homeland security and government contracting markets, consumer goods, energy, energy & construction, financial services, services, media, sports & entertainment and in high growth emerging markets such as China and India.
In 2003, the lack of opportunities for mid-market public investors to "back" experienced managers combined with the trend of upsizing private equity funds pushed entrepreneurs to directly seek alternative means of securing equity capital and growth financing. At the same time, the rapid growth of hedge funds and assets under management and the lack of compelling returns available in traditional asset classes led institutional investors to popularize the SPAC structure given its relatively attractive risk reward profile. SEC governance of the SPAC structure and the increased involvement of the bulge bracket investment banking firms such as Citigroup, Merrill Lynch and Deutsche Bank has further served to legitimize this product and perhaps a greater sense that this technique will be useful over the long term.
SPACs are forming in many different industries and are also being used for companies that wish to go public but otherwise cannot. They are also used in areas where financing is scarce. Some SPACs go public with a target industry in mind while others do not have preset criteria. With SPACs, investors are betting on management’s ability to succeed. SPACs compete directly with the private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these three groups could result in a bid for the best company and possibly increase valuations.
From October 2007 through January 2008, several billions of dollars were raised in new SPAC issuances. In the first quarter of 2008, stock market performance of SPAC-related securities has been poor. Some investors believe this poor performance reflects the large number of SPACs in the market looking for deals together with the generally lackluster performance of SPACs that have approved and completed business transactions to date. Moreover, investor sentiment for SPACs is reflected in the diminishing interested reflected since 2007. For example, 66 SPACs came public in 2007 with total IPO investment proceeds of more than $12 billion, the number of IPOs dropped to 17 worth $3.8 billion in 2008 and only 1 worth $36 million in 2009.[1]
These environmental factors have given rise to some new games and players in the SPAC arena—of which investors should be aware. "SPAC Bandits" typically buy the common stock of a SPAC that is trading at a discount to the value of assets in trust. They may also sell short the SPAC's warrants. If the management of the SPAC is unable to find a deal within the allotted time frame, or if the proposed deal is voted down by shareholders, the SPAC Bandit profits when the SPAC and trust funds are liquidated. (In either case, the value of the warrants goes to zero.)
If the proposed business transaction is semi-palatable to a significant number of investors but shareholder approval is not assured, an investor can accumulate a position in the common shares of a SPAC (and, if desired, the warrants) and attempt to "SPACmail" management. That is—the investor can offer the SPAC management his "Yes" vote for the deal in exchange for some additional consideration. Back in the 1980s, "Greenmail" became taboo in corporate America almost as quickly as it arose. SPAC management teams have a very strong financial incentive to see their proposed transactions approved. It remains to be seen how SPACmail will develop.
Recently, JP Morgan in their attempt to prevent SPACmail added a no inducement to vote provision in the $300 Million SPAC named ANGELO, GORDON ACQUISITION CORP. It states "We, our sponsors and Angelo, Gordon have agreed that we and they will not, and will not permit any of our respective affiliates that we or they control to, pay or cause to be paid any consideration to or for the benefit of any public stockholder for or as an inducement to any vote for approval of our initial business combination (including payments of money, transfers of securities or purchases of securities) unless such consideration inures on an equal basis to the benefit of all stockholders who do not convert their shares in connection with the stockholder vote to approve our initial business combination."
A SPAC is similar to a reverse merger. However, unlike reverse mergers, SPACs come with a clean public shell company, better economics for the management teams and sponsors, certainty of financing/growth capital in place - except in the case where shareholders do not approve an acquisition, a built-in institutional investor base and an experienced management team. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies in reverse mergers.
SPACs typically raise more money than reverse mergers at the time of their IPO. The average SPAC raises about $115 million through its IPO compared to $5.24 million raised through reverse mergers in the months immediately preceding and following the completion of their IPOs. SPACs also raise money faster than private equity funds. The liquidity of SPACs also attracts more investors as they are offered in the open market.
Hedge funds and investment banks are very interested in SPACs because the risk factors seem to be lower than standard reverse mergers. SPACs allow the targeted company’s management to continue running the business, sit on the board of directors and benefit from future growth or upside as the business continues to expand and grow with the public company structure and access to expansion capital. The management team members of the SPAC will typically take seats on the board of directors and continue to add value to the firm as advisors or liaisons to the company's investors. After the completion of a transaction, the company usually retains the target name and registers to trade on the NASDAQ or the New York Stock Exchange.
In the United States, the SPAC public offering structure is governed by the Securities and Exchange Commission (SEC). A public offering for a SPAC is typically filed with the SEC under an S-1 registration statement (or an F-1 for a foreign private issuer) and is classified by the SEC under SIC code 6770 - Blank Checks. Full disclosure of the SPAC structure, target industries or geographic regions, management team biographies, share ownership, potential conflicts of interest and risk factors are standard topics included in the S-1 registration statement. It is believed that the SEC has studied SPACs to determine whether they require special regulations to ensure that these vehicles are not abused like blind pool trusts and blank-check corporations have been over the years. Many believe that SPACs do have corporate governance mechanisms in place to protect shareholders. SPACs listed on the American Stock Exchange are required to be Sarbanes-Oxley compliant at the time of the offering including such mandatory requirements as a majority of the board of directors being independent and audit and compensation committees.
SPACs are more transparent than private equity as they are registered offerings regulated by certain SEC rules, including filing their financial statements and full disclosure of any material events affecting the company. Since SPACs are publicly traded, they provide liquidity to an investor (i.e. investment comes in the form of common shares and warrants which can be traded). Further, the unit structure, the ability to decouple the units and trade separately the common shares and the warrants, allows investors to correspondingly increase or decrease their risk return profiles. The unique benefits are the special rights of shareholders to vote in approval or rejection of the deal and the ability for investors to regain most of their funds, typically greater than 98%, if the SPAC fails to generate an acquisition within a 24 month period or should they vote against the deal and convert their shares for cash. In addition, it is an opportunity for individuals not qualified to buy into hedge or private-equity funds to participate in the takeovers of private operating companies that those funds typically do. Additionally, the SPAC vehicle for the target company is the opportunity to effect a reverse merger that yields more capital.
Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks may include:
There is also potential for delay and expense attributable to the public shareholders' special rights and the costs of functioning as a registered public company.
Research coverage of SPACs has been limited. This is due to conflicts that discourage underwriters from covering the companies they are most familiar with. In addition, traditional sell side coverage is hesitant to allocate time and effort to research a company when certainty of deal completion is not known.
Since 2003 approximately $20.4 billion of SPAC capital has been raised and 158 SPACs have been funded in the United States. Of the 161 SPACs that have been raised in the United States, 72 SPACs accounting for $6.5 billion have completed an acquisition with annualized returns to investors of -1.2%. Approximately 17 SPACs accounting for $3.4 billion have announced transactions with annualized returns to investors of -15%. Approximately 23 SPACs accounting for $6.5 billion are currently seeking an acquisition with annualized returns to investors of -16%% and 49 SPACs accounting for $4.47 billion have liquidated with annualized returns to investors of about -2.5%.[2][3]
On December 7, 2007, approximately $1.23 billion worth of SPACs went public, setting a new one-day record. The three SPACs that went public raising $1.23 billion were Liberty Acquisition Corp. (AMEX: LIA) which raised $900 million in an offering led by Citigroup and Lehman Brothers, Global Brands Acquisition Corp. (AMEX: GQN) which raised $250 million in an offering led by Citigroup, and Tremisis Energy Acquisition Corp. II (AMEX: TGY, led by Lawrence S. Coben) which raised $76 million in an offering led by Merrill Lynch and EarlyBirdCapital.[2][3]
81 SPACs are currently on file with the SEC, representing over $13.4 billion in future financings and 39 SPACs have been filed with the SEC since January 1, 2008, representing over $6.7 billion filed this year.[3][4]
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