Special purpose acquisition company (SPAC) activity has exploded in the past two years, from 59 transactions in 2019, to 248 deals in 2020, to 308 SPACs so far in 2021. However, SPACs are not new. This type of transaction has been around for decades, continually evolving as it rises and falls in popularity.
At one point, for example, reverse mergers were popular, in which a private company would acquire a public shell — the very opposite of a modern SPAC transaction.
At this current peak in popularity, SPACs are facing a new batch of challenges and opportunities — and as a result, they are evolving to meet new requirements and expectations. Here’s a look at a few of those changes
1. Short Squeezes
With the recent GameStop news, many companies are wondering if similar short attacks can happen to SPACs. Generally, SPACs may not be susceptible to a dramatic short squeeze option, where, for instance, a stock would go from $10 to $500. However, there are different elements at play with a SPAC that could prompt a short squeeze. Specifically, the actual free float for a SPAC can be much smaller than what’s listed. This can happen when a lot of the IPO participants are institutions that partner on the PIPE, and they’re restricted and cannot sell for three to six months. This tight float can make a SPAC more vulnerable to a short squeeze.
2. The Rise of Retail Investors
As a SPAC and its target company seek to complete the business combination process, the SPAC must hold a stockholder meeting to facilitate a vote on the merger agreement. Each share held by an investor is equal to one vote. In addition to securing a majority of the votes that are cast, the rules generally require that a majority of the shares outstanding actually cast a vote, to reach a meeting quorum requirement of 50%. Without a quorum, the vote must be postponed.
The recent rise in retail investors has made obtaining a quorum increasingly challenging, because individual retail shareholders are historically less likely to cast votes at company meetings. Today, it’s not uncommon to have tens of thousands of individual shareholders (in some SPACs, as much as 50% of the total), each holding a small number of shares, making the process time consuming, costly and cumbersome. As a result, SPACs must diligently and continually educate investors — with a specific focus on retail investors — about the business opportunity and shareholder voting process.
3. Increased International Focus
For several years, SPACs focused on U.S. companies because they had a greater familiarity with the U.S. regulatory and political environments. However, the SPAC landscape has grown increasingly competitive, with about 350 SPACs currently seeking targets. This has created an increased focus on the international market, where there is a less competitive environment and fewer SPACs shopping for targets.
4. “Sidecar” Targets
In the traditional SPAC model, the SPAC raises capital for an unidentified target. However, in a few recent SPAC transactions, the SPAC has announced that while they are raising funds for an unidentified target, they may also buy a smaller company (in the same target industry) that’s affiliated with the SPAC. Essentially, the smaller company becomes a “sidecar” that’s acquired along with the target company. The vast amount of the SPAC trust will go to the primary target; however, it is an interesting and evolving option, especially for investors or SPACs that have a high-growth company that may not be big enough to be SPAC-ready.
5. Focus on ESG
Over the past few years, there has been an increased focus on environmental, social, and corporate governance (ESG). Today, nearly all investors now factor ESG into their portfolio decision-making — and that’s true for SPACs, as well. SPACs are now focusing more heavily on ESG when identifying and acquiring targets, even if they don’t have a specific ESG mandate.
SPACs can be an appealing option for companies on the path to going public — as long as they understand how this transaction type is changing. For more information about how SPACs are continuing to evolve, watch the replay of the recent webinar, “SPAC to the Future,” where you’ll hear a panel of experts weigh in on the next phase of growth for SPACs.
