The thing about markets is that it is constantly evolving. One thing that might be in trend today would lose its face in the next, no matter how long it had stayed in the market for. Well, we could say something similar for the traditional Initial Public Offerings as well. Instead of now taking the IPO route, companies are driving their way through the new hot trend in the market, known as Special Purpose Acquisition Company or SPAC. This new trend in the United States has become the ultimate go-to for deal makers and I guess it is time to bid goodbye to the traditional Initial Public Offerings. Here’s why.
These companies, or more specifically investment vehicles, have started emerging as the new popular alternative to IPO for a number of private start-ups, despite being in the western market for decades. According to a report published by the Wall Street Journal, about 300 Special Purpose Acquisition Companies sought deals with about USD 90 billion in cash as of the last month, with more and more vehicles popping up at an unprecedented pace. This is a significantly large amount, especially considering the fact that traditional IPOs helped generate a total of USD 19.8 billion by far in 2021, as compared to the money raised by Special Purpose Acquisition Companies through IPOs that stand at USD 38.3 billion for 2021, with the total amount for the same standing at USD 82 billion for last year. Now I’m aware you must be wondering why we are mentioning vehicles this much and what this is all about. Well, here’s all you need to know about the Special Purpose Acquisition Companies and the investment vehicles.
These companies, often referred to as ‘Blank cheque’ companies, are shell companies that are in existence for the sole purpose of merging with a private business. This may sound a little absurd at the point but think of it as a shortcut for companies to go public. If you’re thinking why companies try to find a shortcut for going public, well think of the hassle that the traditional IPOs make them go through and you would get your answer. These firms achieve this aim of serving as a shortcut by listing themselves on the stock exchanges and raising money from investors, only to later buy private firms to help them go public without any traditional IPO stress. What do these firms do business in, you ask? Well, that’s the thing- they do nothing. These firms list themselves on stock exchanges without any real business and raise investor money. Sounds too easy, right? It is not. These Special Purpose Acquisition Companies only have about 2 years to find a company to acquire or merge with, or else it needs to return the investor money it had raised back to the public.
One of the most important reasons for the success that these Special Purpose Acquisition Companies are receiving is because they aid private companies in one of the most crucial steps of going public through traditional IPOs- raising money. Since Special Purpose Acquisition Companies had already raised money at the time of acquisition or merger, raising money for private firms become much easier as compared to raising money through traditional IPOs. So, if you think of it, the said private company only needs to negotiate with one single entity, as opposed to thousands of individual investors. Not only that, Special Purpose Acquisition Companies aren’t subject to market shift because of the nature of their existence, unlike IPOs. So, the process of fundraising gets much faster and easier. However, with good things come good costs. Unsurprisingly, the cost of raising money through a Special Purpose Acquisition Company is generally more as compared to the process via an IPO. Not only that, the investors’ money that is sitting idled in a Special Purpose Acquisition Company’s trust waiting for a suitable target for up to two years could be put to a much more productive use somewhere else. So, the opportunity cost, even though it can’t be accounted for, is a large one and the economy loses on some surplus in the process, referred to as the dead weight loss. Nevertheless, the private firms, apart from paying a little more for the process, are in benefit.
Well, undoubtedly, with the world moving its way towards the Special Purpose Acquisition Companies, Indian companies are also putting their foot in the direction. About a few years ago, Videocon D2H got itself listed on the NASDAQ through a reverse merger with a blank cheque vehicle Silver Eagle Acquisition corporation. Going ahead with the trend, a year after the Videocon merger took place, Yatra.com- a domestic flight booking app also started trading on the NASDAQ after a USD 218 million reverse merger with the Terrapin 3 Acquisition corp., a United States based Special Purpose Acquisition Company. With reports suggesting news for recent developments in the relationship of Indian firms and Special Purpose Acquisition Companies, it is revealed that Softbank backed Online grocery store Grofers is looking forward to the Special Purpose Acquisition Company route while former Star and Disney India chairman Uday Shankar and James Murdoch’s investment company Lupa Systems are eyeing Special Purpose Acquisition Company plans to acquire an Asian Media firm. Walmart Inc.’s Flipkart is also exploring going public in the US through a merger with a blank cheque company as it seeks to quicken its listing process.
So, as far as the relationship between India and Special Purpose Acquisition Companies go, we can expect all things good because Chamath Palihapitiya, the king of Special Purpose Acquisition Companies and founder of Social Capital, is an Indian himself. In the coming years, Palihapitiya’s Special Purpose Acquisition Company Group Social Capital is all set to start seven new Special Purpose Acquisition Companies. Let’s wait to see what future has in store for this trend.
