Hi all,
I've been reading that some companies are bypassing the traditional method of listing via an IPO and are instead listing via the SPAC route.
I understand that at the time of listing SPACs have no business operations and are formed for the purpose of acquiring another company, but I'm a bit confused so I wondered if anybody could explain why they're increasing in popularity now specifically, the benefits/drawbacks of listing this way, and whether this trend is likely to continue?
Hope that makes sense and thanks for any help
In essence, both methods provide a mechanism for private companies to enter into public markets. The key difference is the WAY in which this is done.
In a traditional process, the way a company goes public is as you mentioned, through the traditional process of an IPO. For ordinary investors, the way to participate in the IPO offering is to participate at the start of the IPO process (i.e. roadshows), which is time-consuming and cumbersome due to stringent regulatory requirements.
SPACs are an alternative product that allows investors to participate in newly-listed securities but through a much more cost and time-efficient manner. In a SPAC process, a reverse merger occurs, resulting in the target private company becoming a public entity by virtue of the acquiring SPAC vehicle already being a public entity.
From the issuer (company that wants to go public) perspective, a SPAC represents a relatively more certain way of participating in the public markets within a faster timeline. In the traditional IPO, the issuer will need to organise a lengthy book building process to seek investors/underwriters. In a SPAC, the money is already there. You deal with one entity (the SPAC vehicle) rather than negotiating with a ton of underwriters/subscribers.
From an investor perspective, any underwriting and subscription arrangements have already been done when the SPAC vehicle IPO'ed originally. The SPAC IPO process is much quicker than the target company pursuing an IPO because as you rightly noted, the SPAC vehicle lacks meaningful business history and operations (meaning less DD, disclosure requirements etc.). The downside is that investors lack visibility on the target company the SPAC will acquire (which is in effect, what they are investing in). SPAC investors are in effect taking a punt on the credibility of the SPAC management team seeking depressed valuations and generating meaningful value. In an IPO, investors know what and who they are investing in and can draw independent conclusions about the investment viability.
SPACs have been red-hot lately because there's a lot of liquidity now looking for yield (interest rates are ultra-low) and the stock market has been resilient despite the pandemic. There are other complicated reasons (don't worry, unlikely to be asked for interview purposes) why SPACs are attractive (e.g. share/warrant structure, valuation intricacies). There is currently a lot of controversy about the perceived cost savings for SPAC investors which will definitely shape its future popularity.
Hope this helps!
