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SPACs Demystified For Business Owners

By News Creatives Authors , in Small Business , at July 20, 2021

Founder of FinancialWellnessMD, BioWise Capital, and Smart Block Capital.

SPACs are taking up a lot of space in the financial headlines.

Consider these facts:

• There were a record number of SPACs in 2020 — one out of four initial public offerings was a SPAC merger.

• SPAC listings raised nearly $100 billion just in the first quarter of 2021, compared to $83 billion for all of 2020.

But what are SPACs? How do they work? Should investors be afraid of the rumors of a bubble, or can they be used for financial gain?

In my last two decades of investing, I have seen trends and markets rise and fall, bubbles swell and pop, institutions deemed too big to fail and roaring bull runs that some have missed out on. So, where do SPACs come into all of this? How are they relevant to you as a business owner? And what are the pros and cons?

What is a SPAC?

Despite the hashtag-worthy acronym, SPACs are not really that complex of a concept. SPAC stands for special purpose acquisition company.

SPACs have no real business operations of their own, except for acquiring other companies. They are created specifically as holding companies. What is unique about SPACs is that they are organized to be public companies from the very beginning. They launch an IPO to raise money from the public. Then they go about finding a company to buy.

When a SPAC acquires a company, it is effectively taking that target company public through a backchannel. The company being bought does not have to go through all of the processes, hoops, filings, scrutiny and costs that going public with a traditional initial public offering involves.

What is all the buzz about SPACs?

SPACs have been commanding a lot of buzz and attention in the media recently. The big news is how much money is being plowed into these investment vehicles, as well as some of the high-profile companies and people involved.

Of course, when anything is trending on the web, there are a host of publications and personalities who want to weigh in with their opinions and forecasts as well. Some are investors who have done very well by organizing SPACs themselves, and who say they are very bullish. Consider Chamath Palihapitiya, whose SPAC performance this year, according to Bloomberg Businessweek, has been up over 150%, and down about 75% from that.

Then there are the harsh critics who are bearish on the SPAC space and are warning of a big new bubble brewing.

SPACs And Business Owners

A business being acquired by a SPAC can be highly attractive. It is a path to what could be a big financial exit. This can specifically be a swift shortcut to an IPO, which provides access to public markets and listing, as well as a new cash injection. But it may not be as profitable or nearly as easy as going it alone through the traditional route.

An exit to a SPAC can be efficient. When markets are bullish, your company may be acquired at a lofty valuation, on not much more than promises of forecast performance — even if you are losing billions of dollars right now and having trouble raising money from private markets.

The other way for business owners to get involved with SPACs is as investors or even sponsors. According to Crunchbase, notable people who have been involved with SPACs include Shaquille O’Neal, Serena Williams and Alex Rodriguez.

The Pros And Cons Of Investing In A SPAC

SPACs are an increasingly popular way to invest. They are getting more attention from the U.S. Securities and Exchange Commission and the public. They may be a new, more efficient way to invest and take companies public, but they are not without risk either.

The Pros Of Investing In A SPAC

Aside from the pros I mentioned already, the big upside of SPACs, or what are called “blank check companies,” is that they can often create big surges in stock prices once they acquire a company.

A great example of this is DraftKings, which went from a $10 offering price to being priced at over $71 a share by mid-March 2021. That is a spectacular gain for initial investors who cashed out at the peak.

The Cons Of Investing In A SPAC

The cons of SPAC investing can also be epitomized by DraftKings. Shortly after hitting that peak of almost $72 per share, the stock price dove to just around $40 by mid-May 2021.

The same thing happened to the Nikola car company. The company’s stock went from just over $10 in early 2020, to a high of $74 last summer. By April 2021 it was back to trading in the $10 range.

According to an article published by the Harvard Law School Forum on Corporate Governance, SPAC shares often fall by an average of 30% or more post-merger. And from what I have seen, SPACs seem to accelerate in popularity the most around times of economic bubbles.

SPAC sponsors may see themselves as being immune to losses as they can often get a 20% stake in the deal from the beginning for organizing it. Then, they can leverage most, if not all, of their acquisition with public money.

Advice For Those Who Want To Get Involved

There is no denying that SPACs are roaring in popularity, and not just in buzz. The concept of SPACs is not that complicated. They can be huge money machines. Some may argue that they have become the new and more efficient way to take a company public, though investors who have missed selling out at peak prices in the past may have seen some of their gains as being short-lived.

Here is my advice on how businesses can get involved with SPACs:

• Make an appointment to talk to a financial consultant, a lawyer or an investment banker about taking your own company public through a SPAC deal. Find out what it will take, and what materials you need.

• Look for the opportunity to invest in pre-IPO private companies that may be the next likely SPAC headlines.

• Optimize your investment portfolio to take advantage of this growing bull market, while hedging against any potential downturns in the near future.

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