The COVID-19 pandemic has caused havoc, and there’s a thirst for new sources of capital as businesses try to re-open and in in some cases, get off the ground for the first time in the months ahead. The wealth management sector has in general done pretty well over the past 12 months as markets, fuelled by central bank money printing, have held up. SPACs are a source of new capital but, as the data from the WSJ article suggests, not everyone is having an equally good ride with them.
The winning formula for SPACs is that buyers get a 20 per cent stake in the financing vehicle at a low cost, which turns into a big stake in the target company after a merger. Sellers can go public without the hassles and restrictions of a traditional IPO. But it remains to be seen whether the SPAC structure will work in the US Registered Investor space, given the already-strong M&A market going on the sector.
Paul Bernstein, the vice chair of Venable LLP’s entertainment and media group (based in the US), reckons these SPACs have a short window over which to spend the cash.
“One of the oddities of SPAC-driven M&A activity is that SPACs generally have a two-year time limit in which to either put their cash to work in one or more acquisitions or return it to their public stockholders.
This naturally creates a tremendous incentive for those running the SPACs (who typically own highly preferential “founders’ shares” in their SPACs) to close deals before the time limit is up,” he wrote in a recent commentary.
“When a SPAC raises money, it includes `Risk Factors’ in its prospectus in order to alert investors to certain dangers of buying the SPAC shares. The following language, quoted from a recent SPAC prospectus, should be music to the ears of potential acquisition targets: `The requirement that we complete our initial business combination within the prescribed time frame (i.e., two years) may give potential target businesses leverage over us in negotiating a business combination.’
“Imagine sitting across the negotiating table from someone who has $100 million of other people’s money in their wallet and – in a twist on Hitchcock’s distinction between suspense and surprise - both you and they know that the wallet will blow up on a certain day two years hence. The SPAC cannot conceal the date by which it must either spend its money or return it to stockholders, because that date is disclosed for the world to see in the SPAC’s public filings with the Securities and Exchange Commission.”