A record-breaking boom in US blank cheque companies has ramped up the competition in the hunt for acquisition targets.
Spacs, or special purpose acquisition companies, have raised $51.3bn in the US this year, the highest amount on record and almost half of the $111.6bn raised in initial public offerings, according to data provider Refinitiv. Blank cheque businesses have raised more in 2020 than over the past 10 years combined.
Spacs raise investor capital through a listing on a stock exchange and then hunt for a company with which to merge, offering a side door to the public markets compared to a traditional IPO. As a safeguard, Spacs generally have a set time limit — typically two years — to find a deal before handing money back to shareholders. Stockholders also have the option to vote against a proposed merger.
Some private companies have opted to negotiate with a Spac because the process can shave months off a traditional IPO. A merger between a company and a Spac can take around four to six months to complete, compared to a conventional IPO process that can last 12 to 18 months, or longer.
Negotiations with a Spac can also provide a company debating a merger with clarity on its valuation before going public, which can be appealing in volatile markets. In an IPO, the valuation is set only a day before the listing and relies on the judgments of investment bankers and other advisers.
The heavy Spac issuance comes as other money managers raise multibillion-dollar investment funds, pushing so-called dry powder — capital pledged to private equity and venture capital companies to acquire private businesses — to a record. Taken together, Spacs face more pressure than ever before to secure a target, according to bankers and lawyers.
“There’s been a significant surge of activity on the front end, so there needs to be an increase in [merger] activity,” said Paul Tropp, an attorney with Ropes & Gray who has worked on some of the year’s biggest deals.
“That bears watching over the next 12 to 18 months to see how many of the Spacs that have gone public in the last six months are successfully able to execute a positive business combination,” Mr Tropp added.
The challenge for this year’s Spacs is compounded by those that listed in the past two years that are still hunting for a deal. The 124 Spacs launched this year that have yet to agree a merger with a private company join 27 from 2019 that remain on the hunt, according to data from Dealogic. Analysis of the data showed that for Spacs that listed in 2018, it took about 14 months to announce a deal on average.
Not all dealmakers are sitting idly on the sidelines. Chamath Palihapitiya, a former Facebook executive and venture capital investor, is behind two Spacs that listed in April that have already announced acquisitions. Social Capital Hedosophia II and III will merge, respectively, with Opendoor Labs, a tech company, and Clover Health, which uses data analysis to reduce healthcare costs, in two of the year’s biggest deals. Mr Palihapitiya’s first Spac merged with Virgin Galactic, Richard Branson’s space travel company, last year.
As Spacs become more popular, they are attracting a broader set of investors, sponsors and target companies that are considering them when raising equity capital.
“We’ve seen several clients now who were considering a traditional IPO [that] are now considering a dual track,” said Michelle Gasaway, a partner at law firm Skadden Arps. “It was common for years to consider M&A alongside an IPO but now they are considering a Spac alongside the IPO.”
The US accounts for 99 per cent of the money raised in Spacs globally this year, but the newfound popularity may be soon mirrored abroad. Spacs have gained some ground outside the US but one notable deal underscores the risk of Spacs and the importance of due diligence before a deal is done: Wirecard, the German fintech that was exposed as a fraud, joined the public markets after merging with a Spac.
Investment bankers and attorneys who work on the deals expect them to become a mainstay of the equity capital markets.
“Fundraising is a global business,” said Bennett Schachter, a Morgan Stanley banker specialising in Spacs. “When issuers overseas see the amount of capital being raised and deployed in the US, they very naturally ask: ‘How can we bring that technology overseas and deploy it locally?’”
Not only has the year included record issuance, it has also seen the biggest merger between a Spac and a private group. Last month, United Wholesale Mortgage merged with a $425m Spac in a deal that valued the company at $16bn.
“As Spacs get larger, the . . . deals get larger,” said Ms Gasaway. “That’s a trend we’ve seen for some time and especially this year with the number of Spacs increasing.”