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Why would a company go through a SPAC instead of an IPO? Does the SPAC merger constitute a hedge against uncertainty in an IPO? What I mean is, 23andMe gets c
by engineer_22 6y ago
Why would a company go through a SPAC instead of an IPO?
Does the SPAC merger constitute a hedge against uncertainty in an IPO? What I mean is, 23andMe gets cash NOW and the SPAC gets the company at a discount but accepts the risk the IPO might not meet its goals?
Could someone please explain the strategy?
- deleted 6y ago[deleted]
- scary-size 6y agoTh last twenty Bloomberg Money Stuff [1] columns get into the details of SPAC vs IPO. Matt Levine does a pretty good job explaining finance stuff to non-finance people. [1] https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthew-s-levine https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe...
- mason55 6y ago> Does the SPAC merger constitute a hedge against uncertainty in an IPO? Yes, that's exactly right. You're basically paying for certainty.
- detaro 6y agoIn addition to speed and guaranteed price a SPAC merger also has less reporting requirements, because the SPAC already did go trough the IPO paperwork when it was created. And didn't have to explain weird things about the business to investors because it had no history or things to be going on. It then can relatively easily buy 23andMe, and 23andMe doesn't have to explain its business risks etc to the public as much - which could have been an issue and risk to the stock price given the history of probes about medical claims etc.
- lordnacho 6y agoAm I the only one who thinks that's a massive hole in the rules? You IPO an empty shell, which passes easily because it does nothing, and then any old shop with a messy business can then be bought by it?
- vmception 6y agoThat’s why everyone is riding the gravy train as fast as possible
- thedudeabides5 6y agoYes, that's pretty much the idea. Back in markets, we would of called it 'regulatory arbitrage.'
- lordnacho 6y agoWhy doesn't every IPO happen this way? Once you want to go public, you make a SPAC, get that approved, then have it buy your business?
- anthuswilliams 6y agoThe sponsors of the SPAC set aside for themselves a big chunk of the shares of the newly combined entity. So in general, the company gets a worse price than it would if it had gone public via an IPO.
- buescher 6y agoSo if the principals involved in a startup set up their own SPAC to take the company public, they could screw minority shareholders in the original company like, say, employees?
- ls612 6y agoThe laws generally require that these things be “arms length transactions”, basically meaning that the two parties are legitimately at odds over the price. Your example would not be that.
- smallscientist 6y agoMost sponsors don't hold shares unless for the stock pops way beyond the $10. For the average company, you may end up as a public company with no cash raised. This can be mitigated by a concurrent PIPE, but otherwise you're SOL.
- l-lousy 6y ago23andMe gets to IPO immediately without having to go through a lot of the regulatory work that would normally happen in a direct listing because the SPAC acquiring them is already public. This means they can get a good percentage of the normal cash infusion with half the hassle. Those creating the SPAC get a discounted price on the stock they eventually take public, but for the bill via increased risk they might not get a good company.
- mejutoco 6y agoI believe a SPAC might be cheaper and has less obligations before "going public" that an IPO.
- fatherof2 6y agoThe company gets to go public without having to immediately provide all the materials for due diligence for public investors. The companies shares get peddled to the general public and the SPAC investors and the company both win. The public is left holding the bag.
- koolba 6y agoDon't forget skimping out on the fees and money left on the table when dealing with a traditional investment bank.
- gamblor956 6y agoSPACs acquire targets for significantly less than the potential IPO price, and their are still fees and deal costs associated with the merger, so from the target's perspective, you still end up with less than you would with a traditional IPO even after the fees of a traditional investment bank. So why would a company ever go the SPAC route? SPACs are all about avoiding the (financial) disclosure required for a company going public the traditional way, and if you take a look at the list of companies getting acquired by SPACs this year, every single one of them has a red flag that would make their IPO risky (see, e.g., We).
- hrez 6y agoThere is direct listing (DPO). Spotify and Slack did that.
- grey-area 6y agoWow that seems like the kind of behaviour you'd see in a massive speculative bubble. People buying blank cheque companies without knowing what they're going to get.
- mason55 6y agoIf you don’t like what the SPAC is going to do then you can get your money back before it’s used in the acquisition.
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- deleted 6y ago[deleted]
- brentm 6y agoOne factor is predictability in initial price. The SPAC & company negotiate a fixed price to go public. With an IPO the company begins the process with a valuation in mind but a lot of it still comes down to the roadshow investors, for better or worse.
- ffggvv 6y agoit’s because it doesn’t have the same regulation or due diligence. you can scam retail investors.
- lotsofpulp 6y agoRetail investors have no business investing in an SPAC. If you’re not doing your due diligence, you should stick to VOO. There’s plenty of options for people who don’t want to take risks.
- itsoktocry 6y ago>Retail investors have no business investing in an SPAC It's their entire purpose; to sell to the "retail" public like an ETF.
- lotsofpulp 6y agoThat’s true, but I meant that it doesn’t make business sense for retail investors to buy it. They should stick to cheap diversified broad market index funds.
- yreg 6y agoYour comment reads as if you suggested that would be the only/main reason. Ergo "all spacs are scams"? That's very much not true.
- anthuswilliams 6y agoThe major benefit of going public via an SPAC is avoiding the onerous disclosure requirements associated with an IPO. In particular, the SEC frowns upon projections of imminent, wild growth, which is a big part of the valuation of many companies seeking to go public these days. With an SPAC, a company can go public while still hyping the stock on YouTube or whatever, and without suffering a lockup period during which its executives are not allowed to sell into the mania. The SPAC phenomenon why have suddenly seen so many overhyped companies (NKLA, anyone?) in the public markets lately.
- theptip 6y agoMatt Levine has the best ELI5 on this subject that I've seen: https://www.bloomberg.com/opinion/articles/2021-01-08/spac-magic-isn-t-free https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m... Here's the high-level summary from that article, though there's a lot more detail that's worth digging into: > Here’s how a SPAC works: 1. You give me $10. 2. I put your $10 in a pool with a bunch of other people’s $10, held in a trust account at a bank. 3. I give you back one share in the pool (representing $10 of money in the pool), and one-quarter of a warrant to buy another share for $11.50. (The combination of the share and part of a warrant is sometimes called a “unit.”) 4. I try to find a company to take public within two years. 5. If I fail, I give you back your $10 with interest. 6. If I succeed, I merge the pool with the company, giving the company the money in the pool and giving you and your fellow shareholders shares (and warrants) in the new combined company. Also I get a bunch of shares and warrants in the combined company, as a reward for my work. 7. When I do this, I give you the choice to either (a) let your money ride and take a share in the new company or (b) get your $10 back, with interest.
- mywittyname 6y agoCan the general public invest in SPACs? Are there SPACs that target specific markets, like tech, finance, real-estate, etc?
- dehrmann 6y ago> Can the general public invest in SPACs Yes. I'm pretty sure the ticker symbol of this one is VGAC. The problem you get is this: https://vgacquisition.com/objective/ https://vgacquisition.com/objective/ > VG Acquisition Corp (VGAC) aims to invest in a strong business with a proven track record that can deliver attractive returns to public market investors by capitalizing on Virgin’s brand and global resources. I'm sure some target specific markets, but this one doesn't.
- tedunangst 6y agohttps://spactrack.net/activespacs/ https://spactrack.net/activespacs/
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- gcblkjaidfj 6y agoso they can continue to hide from public that most of their revenue is from secondary use they monetize from their database: research & law enforcement (or anyone that wants to buy their anonymized database, that still seem to contain zipcode)
- itsoktocry 6y ago>Why would a company go through a SPAC instead of an IPO? Less regulation and disclosure. Don't let anyone tell you differently.