Special Purpose Acquisition Companies, or SPACs, are all the rage at the moment. In 2020, SPACs raised $83 billion in proceeds from their IPOs and already in the first quarter of 2021 they raised $88 billion. This is big money and many companies, particularly offshore companies, are keen on being acquired by an SPAC as a means of raising capital and going public.
But what is an SPAC?
An SPAC is, essentially, a publicly traded holding company. It is created with the sole intention of buying other companies.
When an SPAC is born it goes through the initial public offering (IPO) process on the relevant stock exchange. Most SPACs are listed on the New York Stock Exchange and this gives them access to the largest pool of potential shareholder investors in the world. When going the IPO process, SPACs do not conduct the same level of disclosure as a traditional company because they have no existing assets or operating businesses. They are created for the sole purpose of investing in an as of yet undisclosed company or companies. This minimizes the disclosure requirements for the IPO of the SPAC and reduces legal and regulatory compliance costs for the SPAC.
Shareholders of an SPAC are, in large measure, acting as venture capitalists who invest in startups. They are investing in large measure in the reputation and capabilities of the founder/owners as the targets of the SPAC are undisclosed at the time of the IPO. Shareholders have to trust that the SPAC will invest in a company that will warrant the share price at the time of the IPO. Despite this risk, there are some protections against abuse.
When a shareholder invests in an SPAC, in addition to shares, they are given a warrant which gives them the right to sell their shares back to the SPAC at a specified price, often the original purchase price of the share. Funding raised by SPACs through an IPO is placed in an interest-bearing trust account which can only be accessed for two purposes: paying back shareholders on the exercise of their warrant, or buying a company. This prevents the management of an SPAC from spending the money frivolously or on activities that dilute the purpose of the SPAC.
After an SPAC completes its IPO and is fully funded it then will go about finding a company to buy. For example, SPAC vehicle Altimeter Growth Corp., is currently going through the process of merging with Grab Holdings Inc., the Southeast Asian e-commerce unicorn. Unfortunately, since news of the deal was announced, Altimeter Growth Corp.’s stock has tanked to near record lows. Not the best news for Grab.
Assuming that the SPAC finds a company to buy, they will go through the traditional M&A process for acquiring ownership in that company using the funds raised by it during its IPO to purchase shares in the target company. During the acquisition process, the stock exchange traditionally requires a great deal of disclosure about the target company and the intended future of the acquisition. This is nearly as exacting a process as the IPO disclosures would be, however, because the deal is not an actual IPO, there is no underwriting required and thus the process can occur slightly more quickly than a traditional IPO.
Once the acquisition is complete, it is as if the target company went public as they are the primary asset of the SPAC and funded solely by the share sales of the SPAC. There may also be another round of shares issued once the target company has been acquired and a more concrete valuation can be assigned to the SPAC.
What does this mean for Vietnam?
Currently, there is not a single Vietnamese company listed on a foreign stock exchange. This may change soon as VinFast has announced its intentions to list in the United States. There are also several large conglomerates who have expressed interest in listing overseas, possibly using an SPAC.
Using an SPAC to go public overseas is a semi-shortcut for Vietnamese companies interested in listing on offshore exchanges. It is not, however, a great deal easier. The disclosure requirements are still onerous. While the acquired company will not be directly responsible for violations of securities rules as the SPAC is technically the reporting entity, they will be owned by the SPAC. As the main shareholder of the acquired company, the SPAC will have the authority to remove management that fails to comply with securities requirements or otherwise act in detriment to the interests of the SPAC and its shareholders. This places an onus on the acquired company little different from that required of companies going through a traditional IPO. The only real advantages of going public via an SPAC versus an IPO are the fact that an underwriter is not required for the transaction and that there is a potential time savings of a month or two to complete the process.
For Vietnamese companies considering an SPAC, they have to determine whether they want to be beholden to a single institutional investor–the SPAC–or whether they want to take a little more time and a little more care and be beholden to a diverse pool of investors who will be less likely to meddle with management and the activities of the company.
SPACs are not for every company. In fact, they are a minority of listed shares on major global stock exchanges. They also bear considerable risks as, in the instance of Grab Holdings, Inc., the loss in the value of Altimeter Growth Corp.’s stock since the announcement of the deal has already resulted in a delay of several months and may ultimately derail the deal entirely. There are also questions of control as the management of an SPAC will essentially be the sole voice governing the shareholder’s meeting of the acquired company. It may be doubtful whether the few advantages of an SPAC are worth the loss of control and the risks involved. It might be better to simply list in an IPO.