How a SPAC merger could help your company finance its future

The growth of special purpose acquisition companies (SPACs) gives private company owners and entrepreneurs an efficient, rapid path to capital.

It’s one of the biggest challenges entrepreneurs and founders face today — how do I access the capital I need to steady my business, transform as needed and scale up for what’s next?

That long road is especially bumpy given current market conditions, where capital is constrained. That’s why some owners of privately held businesses are using a rapidly growing pathway to capital by merging with special purpose acquisition companies, or SPACs.

SPACs are formed to raise capital with the sole purpose of acquiring one or more unspecified private companies after going public, usually within 18 to 24 months. SPACs aren’t operational — they essentially serve as a temporary cash box used to identify a merger target and facilitate its access to public markets.

SPACs have been a legitimate vehicle to take private companies public for years. But they’ve grown in popularity over the past decade. In 2010, just two SPACs underwent an initial public offering (IPO). In 2020, an estimated 76 will complete their SPAC IPO.

As of July 2020, there were 100 SPACs in existence, with $30 billion in equity held in trust seeking acquisitions. By the end of 2020, an estimated 65 mergers between SPACs and privately held companies will have been completed in the past two years.

How a SPAC works

SPACs are formed by sponsors with specialized financial capabilities — usually institutional investors or private equity firms. The sponsor handles the groundwork necessary for the SPAC’s IPO. In some cases, the sponsor also secures additional funding, such as private investment in public equity (PIPE) commitments or debt financing.

The SPAC can’t identify potential targets for acquisition prior to its IPO, but it can specify an industry or geographic area of interest.

Once the SPAC completes its IPO, it can begin reaching out to potential merger candidates. SPACs typically target companies that are two to three times their size to mitigate the dilutive impact of the equity structure.

When an agreement is reached and is approved by shareholders, the transaction closes and the SPAC is considered closed. The target company survives as the publicly listed entity.

Why SPACs are rising in popularity

The benefits for the acquired firm are clear: an expedited public market listing, completed in just the few months necessary to finalize the merger rather than two-plus years of effort. The process is far less disruptive and labor-intensive than a traditional IPO. And the company gains significant capital — including the proceeds from the SPAC’s IPO and other secured funding — to support operational growth, expand supply chains, seek acquisitions and more.

In addition to capital gained through the merger with the SPAC, the target company can now access other forms of flexible capital, such as mezzanine debt, senior debt, convertible preferred shares and more.

Perhaps most importantly, SPAC deals also allow private company shareholders to retain a percentage of ownership, providing additional upside through growth.

In short, SPACs can be an effective tool for private companies — including pre-revenue and operational firms — to gain a public listing and access much-needed capital quickly and efficiently.