SPAC Magic Isn’t Free
Also hybrid IPOs, direct listings, Robinhood, Signal, geezers and art.
Maybe the biggest capital markets story of 2020 was the boom in special purpose acquisition companies. A SPAC raises money from investors in a “blank check” initial public offering, puts the money in a pot, and goes out and looks for a private company to merge with.1 In the merger, the target private company gets the money in the pot and the SPAC shareholders get shares in the new combined company; the result is that the target company has raised cash and gone public through the merger. It is an alternative to an IPO that can offer more speed and certainty and perhaps even a better price.
We have talked about SPACs before, but I have somehow neglected to express appreciation for the clever and elegant bit of financial engineering at the heart of the SPAC structure. Here’s how a SPAC works:2