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Special purpose acquisition companies (SPACs) were big news in 2020, breaking records and captivating markets and media alike.
SPACs raised a record US$82.4 billion in 248 US IPOs in 2020, data from Dealogic shows. This compares with US$13.5 billion for 59 IPOs in 2019. In addition, 92 SPACs announced business combinations in 2020, with a total deal value of US$151 billion, up from 27 SPACS with a total deal value of US$27.6 billion in 2019.
Despite sponsor and investor interest from around the globe, SPACs have primarily been a US phenomenon. That may be changing—the London Stock Exchange is weighing possible rule changes to encourage SPAC listings; Nasdaq updated its rules to enable SPAC listings in Stockholm, effective February 1, 2021; and SPAC offerings are in process on Euronext in various European countries.
With more SPACs raising capital and looking for deals, high-quality target companies should find an abundance of opportunities to raise capital while benefiting from the increasingly top-tier talent of SPAC sponsors.
What are SPACs?
SPACs are shell companies organized by sponsors with operating or investing experience (or both) that raise capital by conducting an IPO and listing on a stock exchange. The resulting funds are deposited into a trust account and then used to acquire or merge with an operating company within a specified timeframe, typically two years.
SPAC investors don't know in advance where or when their money will be invested. For this reason, SPACs are sometimes called "blank-check companies." Finding a suitable target depends on the skill and experience of the SPAC's management team, so investor confidence in their abilities is vital.
Nevertheless, one of the hallmarks of the SPAC is that, in connection with its business combination transaction, each shareholder has the right to redeem its shares for a pro rata portion of the proceeds held in the SPAC's trust account.
A SPAC odyssey
The idea of SPACs is not new. Blank-check vehicles have been around for decades but really started picking up in popularity in mid-2019.
For example, in late December 2019, Diamond Eagle Acquisition Corp., the fifth SPAC sponsored by its management team, announced it had reached an agreement to acquire DraftKings, a digital sports entertainment and gaming company, and SBTech, an international turnkey provider of sports betting and gaming technologies. By the time the transaction closed in April 2020, its common stock was trading at US$17.50 per share, up from US$10.17 prior to the announcement of the deal. From the closing through January 2021, its stock price reached a high of US$63.78, and the company also conducted two primary/secondary follow-on offerings of approximately US$1.6 billion each.
The success of the DraftKings deal caught the attention of many potential SPAC sponsors as well as companies seeking liquidity. And COVID-19 has clearly done little to dent enthusiasm for SPACs. Indeed, pandemic-related market dynamics may even be contributing to their popularity.
Markets remain awash with capital. With public markets largely recovered from the turmoil at the start of the COVID-19 pandemic, investors are keen to buy new issuance, and SPACs have taken a substantial bite out of the market shares of traditional IPOs.
Additionally, retail investors, many of whom are now spending a lot more time at home, have become a significant factor in a number of deals.
Pressure on the traditional IPO has been building for several years, as companies have sought alternatives to address perceived shortcomings in the process. Some important factors that have led companies to choose SPAC business combinations over traditional IPOs include:
- The transaction value is fixed at the beginning of the process, rather than at the end
- Minimum cash can be secured at the outset through private placement (PIPE) subscriptions
- Financial projections can be used to market the transaction
- Existing owners may be able to take out more cash in the transaction
- Valuation gaps can be bridged through earn-outs
The allure of big-name SPAC promoters has also made SPACs more appealing. SPAC sponsors include a clutch of Wall Street veterans, private equity, hedge and other funds, and current and former public company executives who can provide valuable advice, access to capital and, who can open doors.
A number of sectors in particular stood out in 2020. Online gaming has been very active, with several transactions hitting the market in addition to DraftKings. These include the US$3.5 billion transaction between Flying Eagle Acquisition Corp. and Skillz Inc., the US$1.4 billion transaction between dMY Technology Group, Inc. and Rush Street Interactive, LP, and the US$800 million transaction between Landcadia Holdings II, Inc. and Golden Nugget Online Gaming, Inc.
The automotive sector, particularly electric vehicle manufacturers and automotive technology, has also been hot. Notable deals include Velodyne Lidar, which announced in early July its plan to merge with the SPAC Graf Industrial Corp. in a deal that valued the combined entity at US$1.8 billion. Velodyne is a supplier of lidar (light, detection and ranging) technology for developers of autonomous vehicles. The deal closed in October.
Life sciences has also been very active, with a number of SPACs launched by life sciences-focused investment funds.
The road ahead
The opportunity to go public via a SPAC has obvious appeal given the ongoing potential for market volatility and the factors described above. With more SPACs raising capital and looking for deals, high-quality target companies will find an abundance of opportunities to raise capital while benefiting from the increasingly top-tier talent of SPAC sponsors. As such, SPAC deals are continuing to gain further momentum in 2021—and are poised to become more prevalent beyond the US.
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