SPACs: An Alternative Wav to Access the Public Markets

Robert Berger

Journal of Applied Corporate Finance, 2008, vol. 20, issue 3, 68-75

Abstract: Lost amidst the news of the real estate crisis, soaring oil prices, undercapitalized banks, and falling stock prices is a trend that has been quietly building in the U.S. capital markets. Instead of doing traditional IPOs, companies are increasingly going public by merging with Special Purpose Acquisition Companies, commonly known as SPACs. SPACs are publicly traded pools of capital formed for the sole purpose of merging with an operating company. Since the beginning of 2007, they have raised nearly $16 billion in U.S. markets, capital that is now being channeled into billion dollar‐plus mergers. Hedge funds, which provide the bulk of this capital, invest in SPACs as a way to create a customized portfolio of securities that provide private equity‐like exposure but also liquidity and the right to vote on the proposed acquisition. Frequently formed by well‐known sponsors such as Thomas Hicks and Nelson Peltz, SPACs now feature prominently in corporate discussions of strategic options. Companies that consider merging with SPACs often face complicated circumstances, require a major recapitalization, operate in a niche sector that lacks an institutional following, or have no obvious strategic buyers. The author describes how SPACs, by means of privately‐negotiated, tailored transactions, provide companies with access to the public markets in ways that a traditional IPO often cannot. The article includes case studies of three companies in unusual circumstances that, instead of doing IPOs, established access to public markets by merging with a SPAC.

Date: 2008
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