What is a SPAC? (Special Purpose Acquisition Company)

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What the heck is a SPAC?  A Special Purpose Acquisition Company (SPAC) has been around for decades, however not broadly utilized until recently.  Their purpose is to bring a private company public without the private company going through the rigorous and lengthy process of an Initial Public Offering (IPO).  

The process is fairly straightforward. A SPAC is first formed by a sponsor and goes through an IPO process where it raises funds to be used for the purpose of acquiring a private company down the road.  The SPAC then typically has up to 2 years to utilize these funds in acquiring a company otherwise the funds raised are returned to shareholders.  Upon acquisition, a merger between the SPAC and the private company occurs and the organization is publicly traded under a new ticker symbol.  Dimensional Fund Advisors or DFA puts it this way “We can think of a traditional IPO as a company looking for money while a SPAC is money looking for a company.”  There could be many motivations for doing a SPAC versus traditional IPO, but the top one is usually time as most SPAC mergers take just a few months to complete once a potential target is found, while the traditional IPO route could take up to 3 years.  

As of March, there are approximately 300 SPACs on the table for 2021 with over half of those having already gone through the IPS process.  In 2020, in the midst of a pandemic, there were 248 SPACs that raised $82 billion through IPOs.  Needless to say, this is a popular strategy in the business world.

From an investor standpoint, as in every investment, there are some upsides and downsides to these.  A lot of it will have to do with your tolerance for risk and being aware of where the motivation is coming from.  Do you want to invest because it’s the “hot” thing to do?  Does it make sense with your financial plan?  When investing understand these three things:

  1. Every deal doesn’t always grow.  In breaking down a SPAC deal there are a lot of players that get in early before the secondary market and can possibly dilute shares, such as the sponsor company, the PIPE investors, and even current employee/owners.  
  2. You are still investing in a newly public company and a new company that resembles more of a private equity deal, where until the deal is completely finalized some information isn’t available to the public.
  3. Ultimately, there could be some additional risks in the SPAC deals versus traditional IPO’s.  Be emotionally aware you aren’t investing because of FOMO.  As with every popular investment there’s a piece of our brains that doesn’t want to miss out.  As every investment its important to separate that emotion from the logical piece that needs to make sure the investment fits in your plan.

If you are an employee and your company is being taken public via a SPAC it’s a different perspective.  Its very exciting when any company goes public, but when it is via a SPAC it happens a lot faster and with still a lot of moving pieces.  If you are an employee, think about these three things:

  1. Be aware of the details in the terms of the deal and the timing.  There are a lot of moving pieces and not as much time to make decisions.  There could be a cash out option, an exercise period or even a different withholding for taxes than normal.  Understanding how these details fit into your financial plan will help assess the trade-offs and risks.
  2. Be flexible, some of the details or numbers used for evaluation can change quickly.  This can affect one outcome or how one situation would differ than another one.  Have a base strategy in place and then be willing to be flexible with that strategy.
  3. Don’t let emotions cloud your decisions.  This could be a huge home-run and millions of dollars of growth or it could a strike out..  Understanding the tax consequences, the risk/reward in timing, and ultimately the goals for the money are all part of really analyzing it logically.  Emotions and motivations can be all over the place when the excitement of this deal is going on and not letting it cloud the right decisions for your plan is crucial.

SPACs are certainly one of the hottest topics in the business world these days.  As every hot topic, this needs to be approached with diligence and caution.  Always make sure any decision is discussed with an expert and fits into your financial plan logically and emotionally.  

Resources:  DFA and Breakingviews – The house always wins with SPACs | Reuters and Animal Spirits: Bidding Wars (awealthofcommonsense.com)

Source: Wealthquest. Past performance is not indicative of future results. For informational purposes only. Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealthquest, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-530-9700.

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