I know that Special Purpose Acquisition Companies (SPACs) are nothing new in the United States. I have some figures that I extracted from my national daily. (apologies in advance because only subscribers can access the article. I bought the hard copy, which is why I have the data.) In 2019, 59 SPACs were created in America, with US$13 billion invested. In 2020, 247 SPACs were created with US$80 billion created. Just in the first quarter of 2021, 295 SPACs were already created, with US$96 billion invested.
You may wonder about my sudden interest in SPACs since I have been blogging about cryptocurrencies all this while. Well, Grab - a super app and one of Singapore's arguably most prominent companies - got listed on Nasdaq on 2 December 2021! Its merger with US-based Altimeter Growth Crop was said to be the largest SPAC merger ever as it amounted to an impressive US$40 billion dollars. This really aroused my curiosity about these "blank cheque companies" because more and more US-based SPACs are starting to target Southeast Asia's start-ups, which will have an impact on my investment strategies in future. So here are my 8 basic facts about SPACs (forgive this noob!)
1) SPACs are a radical type of initial public offering (IPO). The traditional IPO requires the company to release a prospectus that details information about what the offeror does, introduces key management personnel and how the IPO price was determined, inspires confidence with its past and projected financial statements and explains how it will mitigate the risk factors. However, a SPAC raises money from the public with no core business. Only when it has raised sufficient capital will it then look for a core business to buy with that money. Hence, initially private companies like Grab can go public without go through the traditional IPO process.
2) This means that harnessing a SPAC will enable a company to list in a few months rather than the six months to a year if it were to follow the normal IPO process. Not only can the company skip certain steps in the time-consuming listing, auditing and disclosure process, but it can also exercise more control over its pricing and deal terms when it becomes listed. Examples of US-based SPACs that grabbed the headlines in the first half of 2021 included the SPAC merger of SoFi with Social Capital Hedosophia Holdings Corp. V.
3) SPACs are formed first by "sponsors" who claim to have the expertise to identify up-and-rising stars. These sponsors typically own a stake about 20 per cent while the rest are owned by the general public.
4) Companies that are initiating disruptive breakthroughs in the consumer, technology and biotechnology sectors in this globalised era of flux are highly sought after by SPACs. In Singapore, a SPAC will be given 24 months to find a viable business with a possible 12-month extension. If the SPAC fails to secure an ideal target company, the SPAC will be liquidated and investors will get their money back with interest.
5) If the SPAC manages to secure an alliance with a target company, a merger between the target and the SPAC (otherwise known as a "de-Spac") can occur if more than 50% of independent directors approve the transaction and more than 50% of shareholders vote in approval of the transaction.
6) However, because SPACs are considered a high-risk, high-reward type of investment because they may be speculative in nature or have enormous capital requirements, retail investors like you and me will tread with caution and do our due diligence! We must take into account about how they might have experienced high volatility because the sponsor is a well-known private equity firm or due to hype over the target that eventually overpromises and underdelivers. Experience in the United States has shown us that some SPACs have seen their share prices double or even triple in a matter of days or weeks, only to suddenly plunge to below their IPO prices. Kinda reminds me of crypto, now that we're talking. :P
7) Fortunately, we can choose to redeem our SPAC shares if alarm bells are triggered in our minds, causing us to view the proposed business with suspicion. This is in spite of how we may have voted when the merger was proposed.
8) It is great that US-based SPACs are viewing Southeast Asia start-ups with interest as it exemplifies how the world is our oyster. However, for smaller companies which have a localised business model and does not have any clear internationalisation stategies, they may want to find regional partners and seek listing in their home country's stock exchange as that will be a more viable option for growth, development and prosperity.
Are you invested in SPACs? If so, how does your investment in SPACs compare with your investment in crypto?