Among the possible UK M&A trends as we look ahead to 2021, one causing particular discussion has barely featured in domestic deals in recent years. These are Special Purpose Acquisition Companies (SPACs), also known as ‘blank cheque’ companies.
SPACs are shell companies founded and listed on a stock exchange with the sole purpose of raising money to acquire a target company or companies, taking the company public through what is sometimes called a “reverse merger”.
In the USA, SPAC-driven acquisitions have increased exponentially in the last twelve months. By mid-October 2020, SPACs in the US had raised $48 billion since January, triple the amount raised in the whole of 2019. In the UK, the figure raised by SPACs in 2020 stood at precisely £0.
But, with so much talk surrounding the potential for SPACs to hit the UK market, it’s important to consider the reasons for the existing disparity between the UK and USA and whether we are likely to see a SPAC boom in the UK.
SPACs – The Key Features
As mentioned above, SPACs are companies that exist purely to raise money from investors and acquire other companies, having no commercial operations of their own.
Generally, SPACs are founded by investors or sponsors with expertise in a certain sector or industry who are looking to utilise this to pursue acquisitions in that field. When a SPAC is formed, it is common for the founders to have at least one target in mind, though this is not usually disclosed.
The company seeks institutional investors and underwriters and opens shares up to the public in an IPO, with potential investors ranging from the general public to private-equity funds. The capital raised is then used to complete an acquisition/acquisitions.
While investors are typically not privy to a SPAC’s target acquisition when they first invest, a key feature in the USA is that shareholders are given the opportunity to vote for or against an acquisition once the target is disclosed. This is one of several features that we will discuss in greater depth that have contributed to the popularity of SPACs in the USA and their scarcity elsewhere.
SPACs in the USA
In the USA, SPACs have been credited with reinvigorating the country’s IPO market. SPAC deals have attracted major underwriters, including banks Credit Suisse, Deutsche Bank and Goldman Sachs, and are seen as particularly popular among investors looking for short-term opportunities.
SPAC deals are often described as a “win-win” for those involved: For the executives who found them, they offer generous rewards for finding the right acquisition; for companies acquired by SPACs, they can go public without the burden and scrutiny of a full IPO; while, for investors, the relaxed regulations mean that they can either benefit from a good deal, or simply vote down and leave a deal that doesn’t work for them.
The $48 billion raised by around 100 SPACs in 2020 has shown they are capable of registering a bumper year even amid major disruption and uncertainty.
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