What are SPACs and are they to be feared? (EN/FR)
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(French Version Below)
Special Purpose Acquisition Companies allow a company to be quoted on the Stock Market without having to fulfill all the Initial Public Offering (IPO) requirements. These financial vehicles are therefore experiencing considerable growth on Wall Street and are beginning to develop in Europe. But do these SPAC live up to their promises or are they rather a new type of speculative investment ?
How does a SPAC work ?
A SPAC, is a company that has no activity but organizes fundraising on the Stock Market. The latter convinces investors with the prospect of purchasing one or more non-listed companies with this SPAC. SPAC are not new financial vehicles, but generate great popularity nowadays.
Although the way SPAC work seems utterly simple, they present numerous advantages.
The principle of SPAC is therefore simple, and they offer many advantages, particularly for the not quoted company that will be bought by the SPAC. Indeed, the latter can reach stock exchange quotation in a few months, whereas this process can take up to a year for traditional IPOs. This express quotation is made possible by bypassing the procedures imposed by the Securities & Exchange Commission (SEC) for American companies. IPOs’ costs are also significant, then a SPAC enables the target company to save both time and money. Indeed, the accountancy, legal and marketing costs of an IPO can sometimes be huge. According to a 2015 KPMG report untitled A Guide to Going Public, IPO’s preparation would cost between 7 and 10% of the funds raised.
Moreover, still from the point of view of the company being bought by the SPAC, this method ensures two things: the stability of its valuation and the achievement of the buyout operation. Indeed, during an IPO, until the very last moment, it is possible for the company's valuation to collapse due to the instability of the financial markets. The consequence of this collapse may be the outright abandonment of the IPO project. In the case of an acquisition by a SPAC, the price of a share is determined directly between the management of the target company and the SPAC representatives. This dialogue allows the company targeted by “SPACing” to have its valuation unaffected by market disruptions, which is a desirable feature in the current pandemic context.
As for the investors, after a given time, if the SPAC in which they had invested has not acquired any company, the latter can reclaim their funds. In case of an acquisition, the investors enjoy a major advantage, since they can buy shares of the acquired target company at a price that will have been determined before its acquisition. In other words, the investors can buy shares whose value may skyrocket if the operation were to succeed.
From the point of view of the transaction security, SPAC also tick all the boxes ! When a SPAC considers acquiring the target company, the documents requested are the same as those used for traditional IPOs. Therefore, SPAC are not a way to bypass the rules dictated by market regulators indefinitely. They rather seem to be a way to bypass their authority while the company is being quoted.
Is there a risk in raising such large amounts of money with no guarantee except the reputation of the founders ?
Since SPAC are non-operating companies, they do not have financial statements or operations that can be classified by performance. The success of the SPACing project therefore heavily relies on the reputation of SPAC representatives. It is hardly a coincidence that Xavier Niel, the founder of Free, was the head of a SPAC.
But critics denounce a form of blindness, as SPAC expose investors to risks that are difficult to assess. The companies on which SPAC bet do not seem to be subject to the same degree of scrutiny as during classic IPOs. The emblematic case is that of the start-up Nikola, whose founder, Trevor Milton, was forced to resign on suspicion of misleading investors, about the reality of the company's technological advances. In addition, Nikola has fallen more than 70% since its peak…
To what extent are these SPAC present in Europe and in the United States?
With the current pandemic that destabilises the markets, SPAC have emerged as stable financial vehicles and therefore have been favoured by investors.
In the United States, more than 420 SPAC have raised nearly 85 billion dollars during the year 2020. This represents more funds raised than in the last 10 years for this type of financial vehicle. This boom does not seem to be on the wane at all ! On the contrary, since the beginning of 2021, new SPAC have managed to raise more funds than in the whole last year.
In comparison, in Europe, the number of SPAC is 25.
In France, only two SPAC have seen the light of day and were both created by Xavier Niel, Mathieu Pigasse et Pierre-Antoine Capton. The first one, whose name was Mediawan, was launched in 2016 and raised 250 Million euros; and the second, 2MX Organic was created in the late 2020.
However, given the current popularity of SPAC, it is very likely that 2021 will be the year of their rise...
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