Why companies are avoiding traditional IPOs: The contemporary pandemic SPAC boom and its rationale

As of 2020, $48 billion has been raised in the US by Special Purpose Acquisition Companies (SPACs). This…

As of 2020, $48 billion has been raised in the US by Special Purpose Acquisition Companies (SPACs). This represents over a 300% increase from $13.5 billion raised by SPACs in 2019. Notable examples of recent SPACs include Sir Richard Branson’s space tourism venture Virgin Galactic and electric vehicle manufacturer Nikola Corporation. Recently, companies like Airbnb are also in talks with SPACs, in particular with legendary investor Bill Ackman’s SPAC.

SPACs are publicly listed companies, which are created for the sole purpose of acquiring and merging with other private companies. SPACs must first raise capital via an initial public offering (IPO) to become publicly traded; they then use this capital to acquire private companies (referred to as the target). After the acquisition occurs, the target private company then becomes publicly listed in lieu of undertaking its own IPO.

SPACs offer private companies an alternate method to bypass the traditional IPO process for listing on the stock exchange. So why has contemporary utilisation of SPACs increased exponentially? In short, SPACs offer private companies a more timely, less risky, and less restrictive public listing than a traditional IPO.

SPACs offer private companies a more accelerated timeframe than a traditional IPO. The SPAC listing process typically takes 3-4 months, whereas a direct listing from an IPO can take anywhere from 12-36 months. This may explain the contemporary uptick in SPAC utilisation from the cataclysmic effects of COVID-19 pandemic on market stability. With current volatile equity markets, caused by the lack of market certainty from the pandemic, many companies cannot wait for the traditional IPO timeline to gain liquidity and raise funds for their business. Therefore, it can be argued that SPACs provide a more efficient listing method which helps companies quickly access capital during volatile equity markets as in the current pandemic.

SPACs can also then be seen as less risky than IPOs. Under SPAC mergers, the target private company can negotiate and agree to the fixed price of their stock with the SPAC sponsor, as part of their merger agreement, unlike a traditional IPO. Many external factors such as market volatility impact a company’s IPO, therefore a SPAC offers a secured price against any external factors.

SPACs also offer private companies seeking public listing a way to avoid stringent requirements as in a traditional IPO listing. For instance, in the SPAC merger process, private companies are able to avoid the IPO requirement that a company must refrain from promoting its shares until the shares begin trading. Therefore, avoiding these strict IPO requirements may give private companies a competitive edge in listing on the market through SPACs.

Conclusion

The amount of money raised by SPACs in 2020 in the US has increased three-fold from 2019. SPACs offer an alternate method for private companies to bypass the traditional IPO process. The pandemic has greatly expanded this method, with recent notable examples including Virgin Galactic utilising a SPAC. This surge in demand can be explained from the advantages offered by SPACs in light of current market volatility resulting from the pandemic: a more timely, less risky, and less restrictive public listing.

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