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Use of SPAC for listing of a company
20 Mar 2022 (287 views)  


Someone asked me to explain the use of a SPAC (special purpose acquisition company) to take over a company that wants to be listed, e.g. Grab, Property Guru.

You can read a full explanation of SPAC in this webpage. 

Key Takeaways
- A special purpose acquisition company (SPAC) is formed to raise money through an initial public offering (IPO) to buy another company.
- At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition.
- Investors in SPACs can range from well-known private equity funds and celebrities to the general public.
- SPACs have two years to complete an acquisition or they must return their funds to investors.

Advantages of a SPAC
SPACs offer some significant advantages for companies that have been planning to become publicly listed. Firstly, a company can go public through the SPAC route in a matter of months, while the conventional IPO process is an arduous process that can take anywhere from six months to more than a year.

The owners of the target company may be able to negotiate a premium price when selling to a SPAC because the latter has a limited time window for making a deal. In addition, being acquired by or merging with a SPAC that is sponsored by prominent financiers and business executives can give the target company experienced management and enhanced market visibility.

Risks of a SPAC
An investor in a SPAC IPO is making a leap of faith that its promoters will be successful in acquiring or merging with a suitable target company in the future. The reduced degree of oversight from regulators, coupled with a lack of disclosure from the typical SPAC, means that retail investors run the risk of being saddled with an investment that could be massively overhyped or occasionally even fraudulent.

Returns from SPACs may be well below expectations when the initial hype has worn off. Strategists at Goldman Sachs noted in September 2021 that of the 172 SPACs that had closed a deal since the start of 2020, the median SPAC had outperformed the Russell 3000 index from its IPO to deal announcement; but in the six months after deal closure, the median SPAC had underperformed the Russell 3000 index by 42 percentage points.

As many as 70% of SPACs that had their IPO in 2021 were trading below their $10 offer price as of Sept. 15, 2021, according to a Renaissance Capital strategist. This dismal performance could mean that the SPAC bubble that some market experts had warned about may be in the process of bursting.

Towards the end of 2021 and early 2022, it is evident that SPACs have lost some of their luster due to increased regulatory oversight and less than stellar performance.

TKL's view.
I avoid investing in a SPAC. I prefer to wait for the SPAC to take over a company and to wait for several months for the price to settle down to its proper market value. 

Tan Kin Lian
 


Use of SPAC for listing of a company
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Someone asked me to explain the use of a SPAC (special purpose acquisition company) to take over a company that wants to be listed, e.g. Grab, Property Guru.

You can read a full explanation of SPAC in this webpage. 

Key Takeaways
- A special purpose acquisition company (SPAC) is formed to raise money through an initial public offering (IPO) to buy another company.
- At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition.
- Investors in SPACs can range from well-known private equity funds and celebrities to the general public.
- SPACs have two years to complete an acquisition or they must return their funds to investors.

Advantages of a SPAC
SPACs offer some significant advantages for companies that have been planning to become publicly listed. Firstly, a company can go public through the SPAC route in a matter of months, while the conventional IPO process is an arduous process that can take anywhere from six months to more than a year.

The owners of the target company may be able to negotiate a premium price when selling to a SPAC because the latter has a limited time window for making a deal. In addition, being acquired by or merging with a SPAC that is sponsored by prominent financiers and business executives can give the target company experienced management and enhanced market visibility.

Risks of a SPAC
An investor in a SPAC IPO is making a leap of faith that its promoters will be successful in acquiring or merging with a suitable target company in the future. The reduced degree of oversight from regulators, coupled with a lack of disclosure from the typical SPAC, means that retail investors run the risk of being saddled with an investment that could be massively overhyped or occasionally even fraudulent.

Returns from SPACs may be well below expectations when the initial hype has worn off. Strategists at Goldman Sachs noted in September 2021 that of the 172 SPACs that had closed a deal since the start of 2020, the median SPAC had outperformed the Russell 3000 index from its IPO to deal announcement; but in the six months after deal closure, the median SPAC had underperformed the Russell 3000 index by 42 percentage points.

As many as 70% of SPACs that had their IPO in 2021 were trading below their $10 offer price as of Sept. 15, 2021, according to a Renaissance Capital strategist. This dismal performance could mean that the SPAC bubble that some market experts had warned about may be in the process of bursting.

Towards the end of 2021 and early 2022, it is evident that SPACs have lost some of their luster due to increased regulatory oversight and less than stellar performance.

TKL's view.
I avoid investing in a SPAC. I prefer to wait for the SPAC to take over a company and to wait for several months for the price to settle down to its proper market value. 

Tan Kin Lian