"Rising SPACs Amid COVID-19 Volatility: Opting for SPAC Deals Over Direct IPOs"

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Special Purpose Acquisition Companies (SPACs) are emerging as a stable means for companies to secure funding. This is a reaction to increased market uncertainty and volatility following the COVID-19 pandemic.

On the 13th (local time), the Wall Street Journal (WSJ), citing U.S. market research firm Dealogic, reported that the funds raised by SPACs this year have reached $12.1 billion (approximately 14.6 trillion KRW) as of that date. A SPAC is a company established by individuals or institutional investors for the purpose of acquiring other companies. After securing investment funds through an IPO, it provides capital to promising unlisted companies, its main clients, on the condition of acquisition. The management rights are either taken over by the SPAC or entrusted to the existing management. In other words, companies secure funds through an indirect IPO method. The SPAC market size grew to $12.1 billion in 2007 but fell to nearly zero during the global financial crisis in 2009. Since then, it has grown again, reaching $13.5 billion last year.

Recently, billionaire investor Bill Ackman, founder of the hedge fund Pershing Square, announced plans to pursue an IPO for Pershing Square Tontine Holdings, a SPAC. This company is expected to raise $4 billion, which, if considered, suggests that the scale of funds raised through SPACs will surpass last year's level and set a record high. WSJ described it as "the largest IPO in SPAC history," noting that "the difficulties caused by COVID-19 are fostering new interest in the unique investment vehicle known as a 'blank check company' (SPAC)."

The recent attention on SPACs is because companies can secure funds stably through SPACs without conducting a direct IPO. Investors invest in promising companies and earn returns if the company’s value increases. In a highly volatile market, it is difficult for companies to secure funds through a direct IPO, and there is a risk that investments may not be finalized at the last moment. SPACs serve as a detour to reduce uncertainty.

WSJ introduced that 20 companies have used SPACs for going public this year. The market capitalization of the acquired companies reached $43.1 billion as of that date. Representative examples of companies acquired by SPACs include U.S. electric truck startup Nikola and gaming company DraftKings. Their market capitalizations are $19.5 billion and $10.4 billion, respectively. Electric vehicle startup Fisker, snack manufacturer Utz Quality Foods, and online casino Golden Nugget Online Gaming have also announced plans to go public through SPACs.

Among the companies that went public via SPAC this year, Nikola, with the highest corporate value, initially weighed IPO and SPAC transactions as methods of going public until early this year. However, as COVID-19 spread and the market rapidly changed, they ultimately chose SPAC as a means that allowed quicker decision-making on transaction terms and easier negotiations compared to an IPO. Kim Brady, Nikola’s Chief Financial Officer (CFO), said, "We chose the SPAC route because we judged there was too much uncertainty in the market due to COVID-19," adding, "If we had chosen the IPO route, we would not be a listed company at this point."

However, some express concerns that going public through SPACs may not undergo as thorough scrutiny as traditional IPOs, potentially exposing investors to risks. Tyler Gellash, Executive Director of the Association for a Healthy Market, pointed out, "The abbreviated process provides investors with less information and time." WSJ also mentioned the issue that only the SPACs, not the companies using them, might benefit.

This content was produced with the assistance of AI translation services.