Glossary

SPAC

SPAC stands for “special purpose acquisition company” – a company listed on the stock exchange like a normal business, but with no business operations of its own.

SPAC stands for “special purpose acquisition company”. A SPAC is listed on the stock exchange like a normal business. However, a SPAC doesn’t have any business operations of its own. Instead, its sole purpose in listing is to raise money to buy an existing company. SPACs are thus also known as “blank cheque companies” in the US. In the UK, they’d more commonly be described as “cash shells”. 

Investors in the SPAC pay $10 per unit. That buys a share in the SPAC, plus other securities (“warrants” and “rights”) whose future value will depend mostly on the value of any deal the SPAC does. Once it has listed, the SPAC generally has two years to find a deal. If it doesn’t then it has to return the cash to shareholders. If it does find a deal, then investors can still back out – redeeming their shares for $10 plus interest and keeping the other securities.

For private companies, the benefit of joining the stockmarket by merging with a SPAC is that it is less stringent in regulatory terms than the traditional process of listing via an initial public offering (IPO). For investors – particularly small investors – buying into a SPAC theoretically offers a chance to invest in deals and companies that they would otherwise struggle to access.

What’s the downside? SPAC incentives are skewed towards the founders, who usually get 20% of the stock at a discount, or even free. An even bigger issue is dilution. An analysis of 47 SPAC deals done in the 18 months from January 2019 by Michael Klausner of Stanford Law School and Michael Ohlorogge of New York University School of Law found that, on average, SPACs lost 12% of their value within six months of a merger deal. This is mainly due to initial investors – usually hedge funds – redeeming their shares prior to the merger. So they get their money back plus interest, plus the warrants and rights. Those who remain invested bear the cost of this “free money”.

Recommended

Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020
Intangible assets
Glossary

Intangible assets

An intangible asset is anything that a company owns that isn’t physical.
25 Sep 2020

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021