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Bloomberg recently reported that Flipkart, the Indian e-commerce giant owned by Walmart, was considering going public in the U.S. by merging with a SPAC or a special purpose acquisition company, with a valuation target of at least $35 billion.
Before this, ReNew Power, India’s biggest renewable power producer, agreed to merge with a blank-check company RMG Acquisition Corp. II giving ReNew Power an enterprise value of $8 billion. This will close in the second quarter, according to a statement published in February 2021.
When former unicorn darling WeWork set out to go public in 2019, its IPO imploded as its business model and co-founder Adam Neumann’s management came under intense scrutiny. Now, the office space leasing start-up is in talks to go public via a different maneuver via a SPAC.
SPACs are one of the hottest trends on Wall Street right now. WeWork, Flipkart, and ReNew Power are just the latest in a growing list of companies considering or pursuing this route. In fact, roughly 200 SPACs went public in 2020 (including Virgin Galactic, DraftKings, Opendoor, and Nikola Motor Co.), raising about $64 billion in total funding, nearly as much as all of last year’s IPOs in the US combined, according to Renaissance Capital.
So what exactly is a SPAC? What would make some companies pick a SPAC over an IPO? And why are investors lining up to jump on the trend?
What is a SPAC?
A special purpose acquisition company (SPAC) is a “blank-check” shell corporation designed to take companies public without going through the traditional IPO process.
A special purpose acquisition company is formed to raise money through an initial public offering to buy another company.
At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition.
In creating a SPAC, the founders sometimes have at least one acquisition target in mind, but they don't identify that target to avoid extensive disclosures during the IPO process (This is why they are called "blank-check companies").
IPO investors have no idea what company they ultimately will be investing in. Investors in SPACs can range from well-known private equity funds to the general public.
The money SPACs raise in an IPO is placed in an interest-bearing trust account. These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated.
SPACs have two years to complete an acquisition or they must return their funds to investors.
(Image Credits: PwC)
The Growth of SPACs
Though SPACs have been around for decades, the financial maneuver has gained traction in recent months as more private companies eye exit opportunities and as the Covid-19 pandemic creates uncertainty in the IPO market (Many companies chose to postpone their IPOs for fear that the market volatility could spoil their stock’s public debut). The target company is able to go public quickly without much of the volatility associated with a traditional IPO, and investors get access to high-reward investments with limited risk.
Popular SPAC sponsors, including early Facebook executive and the so-called ‘king of SPACs’ Chamath Palihapitiya as well as a spate of celebrity endorsements, including those of Jay-Z and Steph Curry, have made SPAC investment even more compelling.
(Image Credits: WSJ)
What Happens Next?
While some high-profile SPACs have performed reasonably well, advisory firm Renaissance Capital found that the average returns from SPAC mergers completed between 2015 and 2020 fell short of the average post-market return (U.S. markets) for investors from an IPO.
Short-seller Carson Block calls the SPAC trend the “Great 2020 Money Grab” in a paper for his firm, Muddy Waters Research, in which he writes that
“a business model that incentivizes promoters to do something — anything — with other people’s money is bound to lead to significant value destruction on occasion.”
SPACs may also come under more regulatory scrutiny as the SEC takes a closer look at how they operate and how well they’re understood by retail investors.
Till then, here’s a website that allows you to find out how long one can take to get ‘SixPAC ab'ed’ like Chamath.