Listing via a SPAC. How it works.
Instead of taking the traditional IPO route, many IT, health technology, and fintech companies are currently making the move to the stock exchange by merging with special purpose acquisition companies (SPACs). But how does a SPAC work and what do they mean for investors?
How does a SPAC work?
A special purpose acquisition company (SPAC) is a shell company. The business purpose of this shell company is to identify and acquire an unstated and unlisted company on the market, and make it publicly tradable via the takeover. A SPAC can be thought of as a wallet filled by means of an initial public offering (IPO) that a qualified sponsor prospectively lists on the stock exchange.
Because SPACs do not yet have a valuation basis when listed on the stock exchange, their shares are usually issued at a unit price of USD 10. Following the listing, the share price may differ from the intrinsic value.
Currently, shell companies are primarily investing in disruptive or digital business models in IT, electromobility, healthcare technology, and the fintech area. The main market for this is the US, although London and Amsterdam have also successfully carried out a number of SPAC flotations in Europe.
Six typical steps of a SPAC:
1. A qualified sponsor prepares a prospectus describing the investment strategy opportunity: for example, a new market niche, a technological innovation, or a competitive disruption in the respective sector. The SPAC can use the prospectus to apply for a simplified stock exchange listing while raising capital from interested investors.
2. The listing is typically followed by a period of 18 to 24 months in order to identify a suitable target company. The capital is blocked during this period. If the search fails, the money is returned to the SPAC shareholders.
3. Next, sponsors and target companies negotiate the investment amount and price. These are subject to final approval by the original SPAC investors. The official announcement of the merger marks the beginning of the de-SPAC transition process.
4. In order to carry out the target investment, SPACs often require additional capital. This money is typically raised through private investments in public equity (PIPEs). These may be pension funds or equity funds, for example.
5. In order to conclude the target transaction, the SPAC requires the approval of the initial IPO investors (not the PIPE investors).
6. The SPAC merges with the target company and assumes its name. Generally the sponsor takes a seat on the supervisory board of the company, in which the entire capital of the SPAC is then invested. The company is thereby listed on the stock exchange and its shares are freely available following the flotation.
The advantages of SPACs
For the target company, the capital transaction with a SPAC has key advantages that also benefit the SPAC investors. For example, in a SPAC transaction, the target company knows the price and the amount of the capital investment in advance. Indirect access to the stock market via merger not only offers greater transaction security and speed; it is also considerably easier than taking a direct route as a result of the reduced regulatory hurdles involved.
This price security and speed when going public, as well as entrepreneurial flexibility, serve to enrich competition on the capital markets and opportunities for investors.
The risks of SPACs
By contrast, reduced regulations entail risks arising, in particular, from limited transparency requirements as well as from the disruptive strategy of some target companies. This increases the need for investors to carry out a thorough review. Credit Suisse also makes investors who potentially want to invest money aware of the risk of price fluctuations arising from premium and discount.