A special-purpose acquisition company is a collective investment structure 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. Characteristics
= Offerings = SPACs were traditionally sold via an
initial public offering 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, American Stock Exchange, and the Nasdaq and New York
Stock Exchange once the public offering has been declared effective by the U.S.
Securities and Exchange Commission, 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.
= Governance = 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. 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.
= Management = 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 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.
= SPACs in Europe = 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 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. = SPACs in emerging markets =
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.
History Since the 1990s, SPACs have existed in
the technology, healthcare, logistics, media, retail and telecommunications
industries after boutique investment bank GKN, specifically founder David
Nussbaum who later found EarlyBirdCapital and David Miller,
currently managing partner of Graubard Miller law firm, 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.
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.
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 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 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."
SPACs and reverse mergers 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.
Regulation In the United States, the SPAC public
offering structure is governed by the Securities and Exchange Commission. A
public offering for a SPAC is typically filed with the SEC under an S-1
registration statement 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.
Advantages 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. 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. Disadvantages
Other than the risks normally associated with IPOs, SPACs’ public shareholders'
risks may include: limited liquidity of their securities
low visibility on future acquisition(s) at the time of the SPAC public offering
dilution due to management and sponsor shares
public shareholder approval contingency may make SPAC unattractive to sellers
potential for uncertainty associated with the SEC merger/acquisition proxy
process 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. Statistics
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%.
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. which raised $900 million in an offering
led by Citigroup and Lehman Brothers, Global Brands Acquisition Corp. which
raised $250 million in an offering led by Citigroup and I-Bankers Securities
and Tremisis Energy Acquisition Corp. II which raised $76 million in an offering
led by Merrill Lynch and EarlyBirdCapital.
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.
See also Capital formation
References