Definition
A Special Purpose Acquisition Company (SPAC) is a type of company specifically created to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The ideal company hasn’t been identified at the time of SPAC creation, therefore, investors of the SPAC rely on the expertise of the SPAC’s management team. SPACs are a popular method for private companies to go public without the process of a traditional initial public offering (IPO).
Key Takeaways
- A Special Purpose Acquisition Company (SPAC) is a type of investment fund that allows public stock market investors to invest in private equity type transactions, particularly leveraged buyouts.
- SPACs are essentially shell or blank-check companies where they raise money from investors with the purpose of acquiring one or more businesses, which are typically not specified at the time of fundraising.
- One main benefit of a SPAC is that it provides a quicker route for a private company to go public, bypassing the traditional IPO process, which may be lengthy and complex.
Importance
The finance term “Special Purpose Acquisition Company” (SPAC) is important as it presents a unique avenue for raising capital and bringing private companies public through a process called a reverse merger.
A SPAC, essentially a publicly-traded shell company, is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe.
The advantage for private companies to go public through SPACs is that it can be a simpler, quicker, and more predictable process compared to a traditional Initial Public Offering (IPO). SPACs provide investors with an opportunity to invest in private equity type transactions, particularly leveraged buyouts.
As a result, the growing popularity and influence of SPACs in finance instigates significant effects on capital markets, investment strategies, and business operations, making it an essential term to understand.
Explanation
A Special Purpose Acquisition Company (SPAC) is a financial tool that plays a distinctive role in the corporate world, especially in terms of business mergers and acquisitions. It is commonly referred to as a “blank check company” due to its primary purpose to raise capital through an initial public offering (IPO) to acquire an existing company.
SPACs offer private companies a faster and potentially less risky method of going public compared to the traditional IPO route. It enables these private companies to gain necessary funding and a listing on a stock exchange without undergoing the complex and time-consuming process typically associated with an IPO.
This means that a SPAC provides an alternative means for companies to achieve their financial goals, particularly those looking for ways of raising a significant amount of capital within a short period. This strategy is often used by startups or high-growth companies, who may not yet be profitable but have high potential.
Using a SPAC, companies can bypass the rigorous IPO process and begin trading on a stock exchange more quickly. The ultimate aim for SPACs, therefore, is to provide an efficient way for investment in private companies, while also offering these companies a simplified approach to becoming publicly traded without the typical hurdles they would otherwise face.
Examples of Special Purpose Acquisition Company (SPAC)
DraftKings Inc: Originally a small private tech company, DraftKings merged with SPAC Diamond Eagle Acquisition Corp. in
This transaction helped DraftKings bypass the traditional IPO process and go public more quickly, leading to substantial growth for the company.
Virgin Galactic: Richard Branson’s space tourism company, Virgin Galactic, became public through a SPAC merger in
The SPAC, Social Capital Hedosophia Holdings Corp, took a 49% stake in Virgin Galactic. This made Virgin Galactic the first publicly-traded commercial space tourism company.
Nikola Motor Company: In March 2020, electric truck maker Nikola Corp. went public after merging with VectoIQ Acquisition Corp., a SPAC. The deal raised about $700 million for Nikola, adding to its value and boosting the company’s public profile.
FAQ: Special Purpose Acquisition Company (SPAC)
What is a Special Purpose Acquisition Company (SPAC)?
A Special Purpose Acquisition Company (SPAC) is a company with no commercial operations, formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.
How does a SPAC work?
SPAC is formed by investors, or sponsors, with expertise in a particular industry or business sector, with the intention of pursuing deals in that area. Post formation, the SPAC then raises funds through an IPO and utilise those funds to buy another company.
What are the advantages of a SPAC?
The primary advantage of a SPAC is that it allows public stock market investors to invest in private equity type transactions. Secondly, for the company being acquired, the process can be an easier and quicker way to go public compared to the traditional IPO route.
What are the risks associated with SPAC?
SPAC investment involves certain risks such as the lack of historical information on the SPAC, dependence on the management team to identify and complete a profitable acquisition, and potential dilution of share value.
What happens when a SPAC acquires a company?
When a SPAC acquires a company, the company becomes publicly traded as the SPAC’s acquisition funds effectively provide the capital for the company to go public. The SPAC is then usually renamed to reflect the company’s brand, effectively completing a “reverse merger”.
Related Entrepreneurship Terms
- Blank Check Company
- Reverse Merger
- Public Shell Company
- Private Investment in Public Equity (PIPE)
- Letter of Intent (LOI)
