/SPACs Are the Stock Market’s Hottest Trend. Here’s How They Work.

SPACs Are the Stock Market’s Hottest Trend. Here’s How They Work.

SPACs are the investment of the moment. With interest rates on the floor and investors chasing young companies, this is a dream scenario for SPACs. To know what’s next and how the boom will end, investors need to understand these quirky financial concoctions.

What is a SPAC?

SPAC stands for special-purpose acquisition company, which is Wall Street jargon for a publicly traded company that holds nothing but cash. Also known as blank-check companies, SPACs exist to buy private companies, and effectively take them public while avoiding the pitfalls of a traditional initial public offering.

The hot market has drawn in Wall Street bankers, tech entrepreneurs and celebrities ranging from Serena Williams to former Cosmopolitan editor Joanna Coles. SPACs have taken popular companies like sports-betting firm

DraftKings Inc.


DKNG 1.56%

and space-tourism company

Virgin Galactic Holdings Inc.


SPCE 2.13%

public.

The SPAC explosion

Starting last summer, SPACs began surging onto the stock market and the momentum continued into this year. Now, hundreds of SPACs are doing deals or are on the hunt for companies to buy. Technology, electric vehicles and green energy have been especially hot areas.

The Three Stages of SPACs

The boom in SPAC IPOs is now playing out in dealmaking. So far the biggest deal was the acquisition of United Wholesale Mortgage by Gores Holdings IV Inc. There have been about 100 mergers completed since early 2018.

SPAC mergers completed

with IPO proceeds and merger value

Gores Holdings IV

IPO proceeds: $425 million

United Wholesale Mortgage (UWM Holdings)

Additionally, there are more than 100 mergers pending approval, such as Rocket Lab USA’s recently announced $4.1 billion deal to go public through the SPAC Vector Acquisition Corp. Darker shades in the chart indicate periods of heavier deal activity where circles overlap.

SPAC mergers pending approval

Vector Acquisition

IPO proceeds: $320 million

Rocket Lab USA

Deal value: $4.1 billion

There are another roughly 400 SPACs searching for merger targets to take public, including hedge-fund billionaire Bill Ackman’s Pershing Square Tontine Holdings, the largest SPAC ever.

SPACs searching for merger targets

Pershing Square Tontine

IPO proceeds: $4 billion

Note: Darker shades reflect clusters of overlapping circles in periods with greater activity. Chart excludes mergers announced prior to 2018 and a small number since. Deal values exclude debt. Data are as of mid-March.

Sources: Dealogic; SPAC Research

SPAC IPO proceeds and merger value

Note: Darker shades reflect clusters of overlapping circles in periods with greater activity. Chart excludes mergers announced prior to 2018 and a small number since. Deal values exclude debt. Data are as of mid-March.

Sources: Dealogic (mergers, IPOs); SPAC Research (SPACs without merger targets)

The three stages of SPACs

The boom in SPAC IPOs is now playing out in dealmaking. So far the biggest deal was the acquisition of United Wholesale Mortgage by Gores Holdings IV Inc. There have been about 100 mergers completed since early 2018.

Pending mergers

Additionally, there are more than 100 mergers pending approval, such as space-transportation startup Rocket Lab USA’s recently announced $4.1 billion deal to go public through the SPAC Vector Acquisition Corp. Darker shades in the chart indicate periods of heavier deal activity where circles overlap.

Searching for targets

There are another roughly 400 SPACs searching for merger targets to take public, including hedge-fund billionaire Bill Ackman’s Pershing Square Tontine Holdings, the largest SPAC ever.

Bigger IPOs

The amount of money raised in SPAC IPOs has ballooned in the past year.

Growing in number

The daily number of SPAC IPOs has soared, with as many as 15 in a single day, which has happened twice this year.

Search period

Once a SPAC goes public, its search for a merger partner to take its place on an exchange can take more than a year, as it did with Chamath Palihapitiya’s SPAC Social Capital Hedosophia and its merger with Richard Branson’s Virgin Galactic.

Accelerating timelines

In the past year, SPACs are finding merger partners more quickly than before, as was the case with Churchill Capital Corp. IV and its pending merger with electric-vehicle maker Lucid Motors.

SPACs have been around for decades but are taking off now because the biggest players from Wall Street and Silicon Valley are using them to raise money and take companies public. They have raised nearly $95 billion in 2021, soaring past last year’s record total, and account for about 70% of all IPOs this year, according to Dealogic.

How do SPACs work?

A SPAC’s “special purpose” is to use the pile of cash it raises in its initial public offering and other funds it takes in to merge with a private company. The private company then gets the SPAC’s place in the stock market. SPACs typically have two years to complete a deal or they must return money to investors. Lately, many have only needed a few months to announce mergers.

Going public via a SPAC is appealing because it lets private firms talk up their business. It also means their valuation is finalized with a small group of players behind closed doors before a deal is announced. In a traditional IPO, pricing can change until the night before shares start trading.

What attracts investors to a SPAC’s IPO?

…BUT SOME THINGS ARE KNOWN…

In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.

Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.

A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.

Investors have downside

protection until a deal is completed.

How else is a SPAC offering different from a traditional IPO?

IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.

Because there

is no business on

which to base a

valuation, SPAC

offerings typically

are priced at $10

a unit.

Depending on the terms, each unit consists of some number of shares and redeemable warrants. A warrant is a contract that allows the holder to buy additional shares in the future at a given price. A short time after the IPO, the SPAC’s units, shares and warrants begin trading separately.

 

The SPAC has a predefined time period in which to merge with a target, typically two years.

Proceeds

are used

to merge

with a

private

company…

…or returned

to investors

if the SPAC

doesn’t

execute

a merger.

DEADLINE PASSES WITH NO MERGER

The SPAC can seek to extend the period, which may require shareholder approval. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

Shareholders may have the right to vote on the merger. If approved, they can either retain their shares of the combined company, or redeem them for a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

Once a SPAC announces its target, both parties can make ambitious projections to investors, something that wouldn’t be allowed ahead of a traditional IPO. That can boost the SPAC’s share price before the regulatory documents associated with the merger are publicly released.

SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of their fee until after the SPAC finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.

Combined company

trades under a new ticker

What attracts investors to a SPAC’s IPO?

…BUT SOME THINGS ARE KNOWN…

In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.

Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.

A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.

Investors have downside

protection until a deal is completed.

How else is a SPAC offering different from a traditional IPO?

Because there

is no business on

which to base a

valuation, SPAC

offerings typically

are priced at $10

a unit.

IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.

Depending on the terms, each unit consists of some number of shares and redeemable warrants. A warrant is a contract that allows the holder to buy additional shares in the future at a given price. A short time after the IPO, the SPAC’s units, shares and warrants begin trading separately.

 

The SPAC has a predefined time period in which to merge with a target, typically two years.

Proceeds

are used

to merge

with a

private

company…

…or returned

to investors

if the SPAC

doesn’t

execute

a merger.

DEADLINE PASSES WITH NO MERGER

Shareholders may have the right to vote on the merger. If approved, they can either retain their shares of the combined company, or redeem them for a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

The SPAC can seek to extend the period, which may require shareholder approval. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

Once a SPAC announces its target, both parties can make ambitious projections to investors, something that wouldn’t be allowed ahead of a traditional IPO. That can boost the SPAC’s share price before the regulatory documents associated with the merger are publicly released.

SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of their fee until after the SPAC finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.

Combined company

trades under a new ticker

What attracts investors to a SPAC’s IPO?

…BUT SOME THINGS ARE KNOWN…

In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.

Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.

A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.

Investors have downside

protection until a deal is completed.

How else is a SPAC offering different from a traditional IPO?

Because there

is no business on

which to base a

valuation, SPAC

offerings typically

are priced at $10

a unit.

IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.

Depending on the terms, each unit consists of some number of shares and redeemable warrants. A warrant is a contract that allows the holder to buy additional shares in the future at a given price. A short time after the IPO, the SPAC’s units, shares and warrants begin trading separately.

 

The SPAC has a predefined time period in which to merge with a target, typically two years.

Proceeds

are used

to merge

with a

private

company…

…or returned

to investors

if the SPAC

doesn’t

execute

a merger.

DEADLINE PASSES WITH NO MERGER

The SPAC can seek to extend the period, which may require shareholder approval. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

Shareholders may have the right to vote on the merger. If approved, they can either retain their shares of the combined company, or redeem them for a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

Once a SPAC announces its target, both parties can make ambitious projections to investors, something that wouldn’t be allowed ahead of a traditional IPO. That can boost the SPAC’s share price before the regulatory documents associated with the merger are publicly released.

SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of their fee until after the SPAC finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.

Combined company

trades under a new ticker

What attracts investors to a SPAC’s IPO?

A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.

…BUT SOME THINGS ARE KNOWN

In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.

Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.

Investors have

downside protection

until a deal is completed.

How else is a SPAC offering different from a traditional IPO?

Because there

is no business on

which to base a

valuation, SPAC

offerings typically

are priced at $10

a unit.

IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.

Proceeds are used to merge with a private company…

…or returned to investors if the SPAC doesn’t do a merger.

MERGER TARGET

IS IDENTIFIED

DEADLINE PASSES

WITH NO MERGER

The SPAC can seek to extend the period. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.

Shareholders vote

on the merger. If approved, they can either retain their shares, or redeem them for a share of the trust account.

The SPAC and its target can make ambitious projections

to investors, which wouldn’t be

allowed ahead

of a traditional

IPO. That can

boost the SPAC’s

share price before the regulatory documents are publicly released.

SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of

their fee until

after the SPAC

finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.

Combined

company

trades under

a new ticker

In the stock market, the SPAC has three lives. The first comes after the IPO, when the company’s only asset typically is $10 in cash per share. The stock trades around $10, and savvy investors can make money anytime the share price falls too low by getting cash at a discount.

The second occurs after the merger is announced, when the shares often swing based on how investors perceive the deal.

The third happens after the merger is completed, when the shares rise and fall based on the new company’s outlook, just like any other stock. Because the private firm gets the SPAC’s place on a stock exchange, the name of the stock and ticker symbol typically change to reflect the name of the newly public company. For example, DraftKings trades under the ticker DKNG.

Share prices of select SPACs and the companies they took public

Social Capital

Hedosophia

Holdings Corp.

Diamond

Eagle

Acquisition

Kensington

Capital

Acquisition

Social Capital

Hedosophia

Holdings

Corp. III

Share prices of select SPACs and the companies they took public

Social Capital

Hedosophia

Holdings Corp.

Diamond

Eagle

Acquisition

Kensington

Capital

Acquisition

Social Capital

Hedosophia

Holdings

Corp. III

Share prices of select SPACs and the companies they took public

Social Capital

Hedosophia

Holdings Corp.

Diamond

Eagle

Acquisition

Kensington

Capital

Acquisition

Social Capital

Hedosophia

Holdings

Corp. III

Share prices of select SPACs and the companies they took public

Social Capital

Hedosophia

Holdings Corp.

Diamond

Eagle

Acquisition

Social Capital

Hedosophia

Holdings

Corp. III

Kensington Capital

Acquisition

Write to Peter Santilli at peter.santilli@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com

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