Bloomberg
Special purpose acquisition companies (SPAC), once a last resort for owners looking to exit an investment, have become a popular choice for private companies spooked by the swings in the regular IPO market. This helped lead SPAC volumes to their best year yet with a range of top dealmakers from private equity firm TPG to banker Michael Klein getting into the mix.
Instead of a regular initial public offering that would raise funds through a share sale, a small but growing number of IPO candidates are choosing to sell themselves to SPACs
instead.
DraftKings Inc is the latest example. The sportsbook operator agreed to sell to Diamond Eagle Acquisition Corp, along with a gaming technology firm, SBTech in $3.3 billion deal. By merging with a SPAC, DraftKings still goes public, but it’s through a reverse merger, or a so-called backdoor listing.
Having well-known backers like blue-chip private equity firms and former public company CEOs involved also has rehabbed the image of SPACs, or blank check companies that raise money for acquisitions.
It didn’t hurt that billionaire Richard Branson did one too. Still, Branson’s space company, Virgin Galactic Holdings Inc which went public after merging with a Silicon Valley-based SPAC, is trading lower than where its shares debuted in
October.
One of the largest companies to do a SPAC deal after exploring an IPO is Blackstone-owned Vivint Home. Blackstone had explored an IPO or sale of the technology company and ended up merging it with a SPAC raised by SoftBank’s Fortress Investment Group, in a deal valued at $5.6 billion including debt.
Merging with a SPAC can save a listing candidate months or even a year compared to a regular IPO, said Ryan Maierson, partner at law firm Latham & Watkins LLP.
The lackluster showings of ride-sharing companies Uber Technologies Inc and Lyft Inc that hurt the IPO market in 2019 have played a big role in the resurrection of SPACs.
“We have a downdraft in IPO activity recently, and SPACs that are looking for a target would be a good fit for companies looking to go public that aren’t finding investors in the IPO market,†Maierson said.
Penny-Stock Reputation
Blank check companies were created in the 1980s and were associated with fraudulent activity and penny stocks, which gave them a bad reputation. They now have stricter rules.
SPACs have raised $13.5 billion in the US this year so far, the most on record and surpassing 2007’s $11.7 billion total, according to data compiled by Bloomberg. These firms announced $24.6 billion of acquisitions this year, another record for the space.
Goksu Yolac, JP Morgan’s head of SPACs, estimates there is nearly $19 billion of capital raised via SPACs “that is waiting to be deployed via M&A.