Positives And Negatives: SPACs Vs. Traditional IPOs

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The rise of SPACs was one of the big stories for investors in 2020. Based on the record number of SPACs filed and money raised in early 2021, the trend looks primed to continue.

Bank of America analyst Michael Carrier shares the positives and negatives of the SPAC market for both investors and private companies to consider.

The SPAC Market

SPACs or special purpose acquisition companies, have been around since the 1990s. Also referred to as "blank check" companies, SPACs are now a popular vehicle for private companies to hit the public markets.

In 2020, 248 SPACs came to market. This was an increase of more than four times compared to the prior year. Carrier says the rise stems from investors seeking alternative sources of yield, private companies pursuing alternative routes to market, and retail investors having a bigger appetite for private assets.

The units that SPACs offer also are particularly attractive to arbitrageurs, Carrier said.

Units include a common share and in most cases a portion of a warrant. SPAC warrants are options to buy a share later, at a price of $11.50 in most cases.

SPAC Timeline:

The timeline of a SPAC consists of several phases, according to Carrier. SPACs do marketing, raise capital and find a target during the premerger announcement phase.

The SPAC makes a deal announcement in the next phase. After the deal is announced, a redemption and vote phase takes place where shareholders can exchange their shares for net asset value, typically $10 plus interest, if they don’t like the deal or shares are trading below that level.

Related Link: Exclusive: Accelerate CEO On SPAC Arbitrage, Why You Can’t Always Bet On SPAC Sponsors

Positives of SPACs

Private companies are flocking to SPAC deals for a few big reasons.

One is that a typical SPAC comes with a 2% underwriter fee and 3.5% fee at completion compared to 7% for a traditional IPO.

The timeline of a SPAC is usually three to four months versus up to a year with a traditional IPO.

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