This “Outside Consultant” column by David Vang, PhD, a professor in the Finance Department at the Opus College of Business, ran in the Star Tribune on Aug. 2, 2021.
A special-purpose acquisition company (SPAC) is a company that raises capital through an initial public offering (IPO). Ironically, the company does not have any concrete, tangible operations itself. Instead, it is like a “shell company” whose purpose is to acquire one or more existing companies. Interestingly, the SPAC may have a specific company they want to buy as they try to raise funds, but it cannot disclose who it is because that would bog down the process in all the disclosure procedures and documentation that a real, tangible company needs to go through during the IPO process. Because of this unique situation SPACs are sometime called “blank check companies.”
The money raised through the IPO is held in an account, and if the funds are not used for the acquisition(s) described above, then the SPAC is liquidated and the funds are returned to the investors.
For companies that are considering selling or going public, being purchased by a SPAC can be an attractive option. There are two specific advantages for a firm to sell itself to a SPAC. First, if a firm wishes to sell out by going public through an IPO, it can be a very expensive, time-consuming process. IPOs require the company to hire an investment banking firm and pay substantial legal and accounting fees to ensure compliance.
Selling one’s company to a SPAC, on the other hand, basically means you are selling your firm to someone who has already gone through all the regulatory and legal legwork necessary to be a public firm in advance. The second advantage is that selling one’s company to a publicly traded firm can increase your sale price relative to the price one gets selling your company to a privately held entity. The difference in price can be as much as 10-30%. Therefore, selling your company to a firm that is already publicly traded makes your firm de facto publicly traded, which increases its potential value.
The hard part is having the contacts and necessary characteristics that would interest a SPAC in having your firm be its intended “target of acquisition” simultaneously at the exact point in history when you decide you do not want to own your business anymore.
David Vang, PhD, is a professor in the Finance Department at the University of St. Thomas Opus College of Business.