“SPAC, SPAC, SPAC!” is what many business podcasts, newspapers and news outlets have been repeating to everyone listening. “Special Purpose Acquisition Companies” aka“SPACs”, have garnered the attention of many as they continuously break funding and deal volume records.
SPACs, also referred to as “blank check companies,” have been around for decades and are formed to complete acquisitions in a particular industry or business sector. They raise capital through an initial public offering (IPO) and the funds are placed in a trust account until a deal is completed or liquidated. Typically, if a deal is not completed in two years, the money is returned to investors. While going through the IPO process, acquisition targets are not identified. With no business operations or announced acquisition prospects, investors do not know what they are ultimately investing in hence the name “blank-check companies.” Even with the inherent risks many SPACs are being back by high-profile individuals. Alex Rodriguez, Serena Williams, Shaquille O’Neal, Jay-Z, DJ Khaled, Ciara, Steph Curry and Paul Ryan have all invested in various SPACs. Underwriters have also included household names such as Goldman Sachs, Deutsche Bank and Credit Suisse.
In 2020 a total of 248 SPAC IPOs were issued and raised $83.4B, a drastic increase from 2019 when $13.6B was raised through 59 SPAC IPOs. In just the first three months of 2021, 308 SPAC IPOs raised $100.1B. Nearly 30% of the capital was raised by companies that operate businesses, as opposed to the typical shell company structure. With the latest IPO issuances, there are currently 408 SPACs looking for companies to merge with. They have a combined $600B in purchasing power from $131.1B in cash. In the first quarter of 2021, US SPAC mergers and acquisitions (M&A) deal volume was up 3,000% year on year to $172.3B. These deals accounted for 75% of the total global SPAC deal activity and 30% of overall US M&A deal volume.
Deal size has also been affected by the surge in SPACs. The average SPAC merger is $2.3B, a substantial increase from $900M in the first quarter of 2020 and $800M in the first quarter of 2019. Some have even been characterized as “megadeals.” One such example is the recently announced Grab Holdings Inc. merger with Altimeter Growth Corporation, a SPAC sponsored by Altimeter Capital. Based in Singapore, Grab began as a ride hailing app, similar to Uber. Since its founding in 2012, Grab has raised $12B and evolved into a “super app” offering food and package delivery, digital payments, financial services, insurance, and healthcare to their 187 million users. Once the deal is complete, Grab will be valued at $39.6B – the world’s largest SPAC merger. The merger will also be the largest share offering of a Southeast Asian company in the US market once it is listed on the Nasdaq under “GRAB.”
The M&A deal market, both domestic and global, has been influenced by SPACs to varying degrees. With fewer fees and shortened timelines to go public, conditions will remain appealing for the formation of SPACs. They also offer an opportunity to foreign companies to enter the US market in ways they are not able to otherwise. However, the recent accounting guidance issued by the Security and Exchange Commission (SEC) would change the classification of SPAC warrants from equity instruments to liabilities. If this becomes the law, the SPAC market may come to a sudden halt.
Author – Ingrid Braun is an analyst at Capstone.