SPAC: a financing tool for acquisitions

Acquisitions require financing. The latter can be obtained from banks through loans or from investors as part of fund-raising operations.

• Definition

SPAC (Special Purpose Acquisition Company) is an acronym for companies listed on the stock exchange for the sole purpose of raising capital on the financial markets. These entities are legal “shells” with no real operational activity. They are created and then floated on the stock market to finance an acquisition of one or more unlisted companies (the “target company” or “target companies“).

In the first instance, investors either subscribe for shares in SPAC or SPAC issues share warrants to them (the “BSAs“). This is how funds are raised.

In a second phase, SPAC acquires the target company.

• Interests

This mechanism, which originated on the other side of the Atlantic, is of interest to the parties involved.

The interest for the target company lies in the possibility of enlarging the circle of potential buyers and obtaining new financing, insofar as the stock market is a financial market in which financial resources are abundant. In principle, unlisted companies have no access to this market because their shares are not admitted to a regulated market.

Thanks to its acquisition by SPAC, the target company is opening up its capital to the public through a quick and easy stock market flotation.

In this way, SPACs act as a genuine intermediary between the stock market and unlisted companies.

Investors are interested in buying shares at low prices in order to make substantial gains when the price of SPAC shares rises.

• Distinction from acquisition holding companies created in LBO transactions

At first sight, there may be confusion between SPACs and acquisition holding companies set up as part of leveraged buy-outs (LBOs) which, like SPACs, are set up to raise funds to buy a target company.

However, there are a number of notable differences.

The first difference lies in the origin of the capital raised by SPAC. Unlike traditional acquisition holding companies, SPACs only raise funds on the stock market. This is why it is being floated on the stock exchange.

The second difference is chronological. In traditional LBO transactions, the acquisition holding company is created after the target company has been identified and the parties have negotiated. However, the SPAC is created even before the target company is identified, which remains a decisive factor in the completion of the transaction. The main drawback of the mechanism is that investors have no information about the target company.

However, to keep the scheme attractive, investors have a number of guarantees. They benefit from a right of withdrawal allowing them to withdraw before the acquisition of the target company and in the event that no target company has been found within a predetermined period (generally equivalent to two years). In such cases, investors are reimbursed the amount of their investment and the SPAC is wound up. Investors also have voting rights enabling them to oppose the transaction in the event of disagreement.

The third difference concerns what happens to the target company after it is acquired. Like acquisition holding companies, SPACs target private companies whose securities are not admitted to trading on a market. The difference arises after the target company has been acquired. After its acquisition, the target company becomes a listed company.

• Legal status

SPACs are not regulated under domestic law. There are no specific laws or regulations governing SPACs. As a result, their creation and use require the compilation of various legal rules combining company law, stock market law and financial law. This complexity can slow down the use of SPAC.

• Decline

Despite their strengths, it seems that SPACs are now in decline.

In the United States, the birthplace of SPACs, they are used less and less frequently. By 2021, more than 300 SPAC IPOs have been registered. Too many SPACs reduce the amount of funds that can be raised, so they lose their appeal and their numbers fall.

In Europe, Pegasus Europe, considered to be the continent’s largest SPAC, is being wound up after a two-year prospecting period. SPAC, created in 2021, raised 483 million euros. Despite the support it received, in part from Bernard Arnault, SPAC was unable to find an attractive target company for the amount raised.

Consequently, whether or not they are used on a massive scale, SPACs have posed difficulties in practice.

This decline can be explained either by the uncertainty of the stock market or by the lack of visibility over the acquisition of the target company. SPAC is not an investment fund and must be distinguished from one.

The fact remains that this tool will surely return in another form, with greater transparency on the target or target categories.