What is Spac?
Spac, also known as an empty shell company or special purpose acquisition vehicle (or stock exchange), is one such entity.
Money raised can be used to buy another company, often a private firm that isn’t listed. This is done to make it easier and more affordable to get the business on the stock exchange.
In the event that an acquisition can’t be made within two years, cash must be returned back to shareholders. This can lead to a rush to purchase the right item, regardless of whether or not it’s suitable. It became an enduring Wall Street trend. Such was the popularity of Spacs in 2021 that 334 deals were done with a value of $597billion – 10 per cent of mergers and acquisitions worldwide.
Change of mood
Why all the excitement?
The Wall Street Spac was at its peak in 2020/early 2021. Profits were sometimes very high.
A role was played by the cult personality. Spacs are associated with Jay-Z, Sir Richard Branson and Donald Trump. When Trump announced he was launching a media company to merge with a Spac, Digital World Acquisition, its share price soared. But, it is unlikely that this event will ever happen.
Which mood are you in right now?
The disappointing performance has caused excitement to drop. The price of the De-Spac ETF (exchange traded fund) is down around 41 per cent over the past 12 months. Certain concerns have been raised about the quality of certain companies that were acquired.
Georgia University professor of corporate finance Usha Rodrigues compares many mergers with hasty Las Vegas weddings.
How do you make money?
Hedge fund investors, who may borrow to invest in Spacs before they are listed, will make a killing if there is a price ‘pop’ (a sharp rise) at the start of trading. At various points, banks who advise Spacs may also be able to earn high fees.
Private investors, by contrast, are only permitted to buy the shares after they start trading – sometimes at an inflated price.
However, many people will be willing to risk their lives if there is a celebrity involved. According to the SEC (US watchdog), this is not a bad idea.
Spacs are coming to the UK
Amsterdam is now Europe’s Spac Capital, and there are listings that include one sponsored by Bernard Arnault (head of LVMh luxury goods company). Branson will likely list another Spac this year in Amsterdam.
UK wants a piece of this action in order to confirm the City’s position as financial center. Rishi Sunak, according to reports, is pro-Spac. Certain listing rules were relaxed. This includes reverse takeovers whereby a smaller company acquires an older business. London has only one Spac at the moment, but more may be available in spring.