Trust investment bankers to come up with new fads to ride a boom. Whilst the concept of Special Purpose Acquisition Company (SPAC), also called Blank Check IPOs are not particularly new, they are making news this year. This piece in the Bloomberg explains what is a SPAC:
“…it’s an investment vehicle that goes public despite having no real business. The plan is to raise money from investors and use it to buy into another company, typically a private one that’s yet to be chosen. More than 40% of 2020’s IPOs by volume have been SPACs, raising $31.6 billion, more than double all of last year’s volume of $12.4 billion. And last year was a record breaker, too. “Three to four years ago, SPACs were just a curiosity,” says Niccolo de Masi, chief executive officer of two blank checks,.. that together raised more than $500 million. “Now it’s an option for everybody.””
And what’s causing the boom:
“The blank check boom—or maybe fad—stems from the collision of two big trends. The first is historically low interest rates. With safe bonds paying less than 1% and stocks trading at high valuations, more investors are willing to park their money with a SPAC in hopes of getting lucky with an acquisition that pays off big. Second is the long-running boom in private equity and venture capital. Investors who poured money into buying companies over the past decade want to cash in by selling them. So there are plenty of companies for SPACs to buy. Add to these an old constant: financiers looking for new ways to earn a fee from a transaction.
The pandemic-induced market volatility in March, which made it difficult for conventional companies to go public, helped bring SPACs into the spotlight. Being bought by a SPAC can be an easier way for a private company to go public: It can skip the usual roadshow for pitching investors and avoid some of the scrutiny that goes with an IPO. Online sports betting company DraftKings Inc. became a public stock in April after completing a merger with Diamond Eagle Acquisition Corp. in a $3.3 billion deal. As is customary in such “reverse mergers,” the SPAC took the name of the business it bought. When the stock price popped from around $10 a share for Diamond Eagle before it announced the deal in December to a peak of $43 in June as DraftKings, it helped add to the buzz around blank check deals.”
“…it’s an investment vehicle that goes public despite having no real business. The plan is to raise money from investors and use it to buy into another company, typically a private one that’s yet to be chosen. More than 40% of 2020’s IPOs by volume have been SPACs, raising $31.6 billion, more than double all of last year’s volume of $12.4 billion. And last year was a record breaker, too. “Three to four years ago, SPACs were just a curiosity,” says Niccolo de Masi, chief executive officer of two blank checks,.. that together raised more than $500 million. “Now it’s an option for everybody.””
And what’s causing the boom:
“The blank check boom—or maybe fad—stems from the collision of two big trends. The first is historically low interest rates. With safe bonds paying less than 1% and stocks trading at high valuations, more investors are willing to park their money with a SPAC in hopes of getting lucky with an acquisition that pays off big. Second is the long-running boom in private equity and venture capital. Investors who poured money into buying companies over the past decade want to cash in by selling them. So there are plenty of companies for SPACs to buy. Add to these an old constant: financiers looking for new ways to earn a fee from a transaction.
The pandemic-induced market volatility in March, which made it difficult for conventional companies to go public, helped bring SPACs into the spotlight. Being bought by a SPAC can be an easier way for a private company to go public: It can skip the usual roadshow for pitching investors and avoid some of the scrutiny that goes with an IPO. Online sports betting company DraftKings Inc. became a public stock in April after completing a merger with Diamond Eagle Acquisition Corp. in a $3.3 billion deal. As is customary in such “reverse mergers,” the SPAC took the name of the business it bought. When the stock price popped from around $10 a share for Diamond Eagle before it announced the deal in December to a peak of $43 in June as DraftKings, it helped add to the buzz around blank check deals.”
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