How SPAC mergers work: Advantages, disadvantages, and differences from IPO

SPACs or special purpose acquisition companies are blank check companies that offer a unique opportunity for private firms to go public quickly. 

In 2021, SPAC activity skyrocketed, raising over $160 billion through 610 SPAC IPOs. In 2022 and 2023, however, the number of deals dropped to 86 and 22 SPAC IPOs, respectively. Now, with new SEC rules in 2024, SPACs and target companies have much to consider.

The article provides details on how SPAC deals work, describes their benefits and drawbacks, and gives a few examples of recent SPAC mergers.

What is SPAC?

A SPAC, or special purpose acquisition company, is a publicly-traded company without any commercial operations. It’s formed with the sole purpose of raising capital through an initial public offering (IPO) to acquire or merge with an existing private company, taking it public. A SPAC is also referred to as a blank check company. 

SPACs are created to provide a faster and more streamlined alternative to traditional IPOs for private companies seeking to go public. They operate by raising funds from investors through an IPO, with shares typically priced at $10 per share.

SPAC investors may range from the general public to major public equity funds. For example, during a surge in SPAC deals between 2020 and 2021, prominent names like Goldman Sachs, Credit Suisse, and Deutsche Bank were actively involved in the SPAC market.

Once a suitable target company is identified, the SPAC merges with or acquires the private company, allowing it to become publicly traded without undergoing the traditional IPO process.

Here’s how SPAC mergers are different from IPO deals:

• Timing
  SPACs typically offer a quicker way to go public compared to traditional IPOs. This is because they can avoid the lengthy process of regulatory filings and roadshows.
• Uncertainty
  In an IPO, investors know which company they’re investing in from the start. With SPACs, however, investors initially invest in a shell company without knowing the merger or acquisition target.
• Flexibility
  SPACs provide greater flexibility for private companies to negotiate terms and valuation compared to traditional IPOs. They can tailor the SPAC structure to meet the needs of both parties.
• Risk
  Investing in a SPAC is riskier compared to traditional IPOs due to the uncertainty surrounding the potential target company. There’s always a possibility of the SPAC failing to find a suitable merger or acquisition opportunity.

How do SPAC mergers work?

A typical SPAC deal takes the following steps.

1. Formation

A SPAC is commonly formed by experienced management teams or SPAC sponsors who invest a small portion, around 20%, known as founder shares. The rest, about 80%, is acquired by public shareholders through units offered during an IPO. These units include common SPAC stock and partial warrants. Before offering shares to the public, SPAC also seeks underwriters and institutional investors.

Both founders and public investors usually have similar voting rights, except founders often have exclusive rights to elect SPAC directors. Warrant holders typically lack voting rights.

Founders may have a target in mind but keep it undisclosed during the IPO process.

2. SPAC IPO

SPACs go public based on an investment thesis that focuses on a particular sector or region. Following the IPO, the raised funds are placed in a trust account, and the SPAC typically has 18–24 months to find and complete a merger with a target company. This process is often called de-SPACing. 

If the team fails to do so within the specified period, the SPAC is liquidated, and the IPO funds are returned to investors. In case additional funds are needed, the SPAC may issue debt or additional shares, including private investments through public equity (PIPE) deals.

3. Negotiation and shareholder approval

Once a suitable target company is identified, the SPAC seeks approval from its shareholders for the merger. This involves preparing and filing a proxy statement or a combined registration and proxy statement containing detailed information about the proposed merger, governance matters, and financial details of the target.

Shareholders vote on the merger, and upon approval and regulatory clearance, the merger is finalized. Within four business days of closing, the SPAC must file a Form 8-K with the SEC, providing details on the newly formed entity.

4. Completion and listing

Once the merger is complete, the target company becomes a publicly traded entity through the SPAC. Shares of the merged company are listed on one of the major stock exchanges, allowing investors to trade them freely.

This listing provides liquidity to existing shareholders and opens opportunities for new investors to participate in the growth potential of the combined firm.

Here’s a shorter summary of how SPAC mergers work: 

Advantages and risks of SPAC mergers

Now let’s explore the pros and cons of SPAC deals.

Advantages 

• Faster process
  Traditional IPOs may take from six months to more than a year, while SPAC mergers typically have a shorter timeline (a few months). This allows companies to go public faster, which is especially important in volatile market conditions.
• Negotiation advantages
  Target companies may negotiate a premium price when merging with a SPAC due to the time constraints within which a deal must be completed.
• Experienced management
  Acquisition by a SPAC backed by prominent investors and executives can provide the target with experienced management and increased visibility in the market. These expertise and connections can potentially facilitate the company’s growth.

Disadvantages

• Decreased regulatory scrutiny
  This means that SPAC deals face less oversight from regulators. This poses potential risks for investors, as there’s a higher likelihood of investments being exaggerated or even fraudulent. Consequently, investors may struggle to make well-informed decisions about where to allocate their funds.
• Low investment returns
  Despite being initially promising, SPACs often deliver lower returns than the broader market after merging. Statistics show that median SPAC performance tends to underperform market indexes after the deal closure.
• Potential deal failures
  SPAC mergers may fail for various reasons, including challenges in negotiating favorable terms, raising sufficient capital, or identifying a suitable acquisition. For example, in 2023 40% of SPACs failed to find a proper target.
• Increased regulatory scrutiny
  Regulators are increasing scrutiny on SPACs, implementing new SEC rules. The key aim is to make SPAC transactions more transparent and protect investors.

Recent examples of SPAC mergers

Here are some recent SPAC merger examples.

1. VinFast Auto and Black Spade Acquisition

VinFast Auto Ltd., an automotive manufacturer specializing in electric vehicles, merged with Black Spade Acquisition Co, a publicly traded SPAC in 2023. The business combination valued VinFast at an equity value of $23 billion.

Shareholders of Black Spade approved the transaction on August 10, 2023. On August 15, 2023, VinFast’s ordinary shares and warrants began trading on the Nasdaq Stock Market under the ticker symbols “VFS” and “VFSWW,” respectively. 

Following the merger, VinFast became a publicly listed company, with Black Spade now a wholly-owned subsidiary. The merger enabled VinFast to access public markets, providing it with additional capital to accelerate its expansion into new markets and develop innovative electric vehicle technologies.

2. GRIID Infrastructure and Adit EdTech Acquisition

In 2023, GRIID Infrastructure Inc., a US-based bitcoin mining company, completed its merger with Adit EdTech Acquisition Corp., a publicly traded SPAC. Adit EdTech acquired GRIID for $3.3 billion, listing it on the New York Stock Exchange.

GRIID focuses on affordable, reliable, and environmentally responsible bitcoin mining. Adit EdTech CEO David Shrier commented, “Carbon-free mining is the future of Bitcoin. GRIID’s low-cost carbon-free energy pipeline, next-generation ASICs, and market-leading execution enable it to generate attractive profitability and growth.”

Thus, this merger illustrates a significant step forward for GRIID’s growth and expansion in the bitcoin mining sector. 

3. Borealis Foods and Oxus Acquisition

Borealis Foods Inc., a rapidly growing food tech company, completed its merger with Oxus Acquisition Corp., leading to its listing on the Nasdaq under the symbol “BRLS” on February 8, 2024.

Borealis focuses on developing affordable, nutritious food solutions to address global food challenges. With products catering to various dietary preferences and distributed across the United States, Canada, Mexico, and Europe, Borealis aims to make nutritious food accessible to everybody.

Borealis’ Nasdaq debut demonstrated its readiness for future growth. And with strategic partnerships, like with Gordon Ramsay, Borealis is expected to succeed in the food tech industry.

4. Trump Media & Technology Group and Digital World Acquisition

Former President Donald Trump’s return to the stock market has attracted significant interest, with shareholders of Digital World Acquisition Corp. approving the merger deal with Trump Media & Technology Group, giving way for the public listing of Truth Social on the Nasdaq.

On the platform’s second trading day, under the ticker “DJT,” shares surged by 14.2% to $66.22, valuing the company at $9.4 billion, and Trump’s 58% stake at an estimated $5.2 billion. The association with Trump attracted both supporters and retail investors, driving meme stock potential, although short-selling proved costly due to limited availability.

Trump’s support strengthens the company’s mission to challenge Big Tech dominance, yet uncertainties remain regarding Truth Social’s financial outlook, given its significant losses and limited revenue.

Key takeaways

Let’s summarize:

• SPACs, or special purpose acquisition companies, offer private firms a faster way to go public compared to traditional IPOs. SPACs operate by raising capital through an IPO, then merging with or acquiring an existing private company, taking it public.
• SPAC mergers typically involve a quicker timeline and greater flexibility in negotiations compared to traditional IPOs.
• SPAC mergers also come with risks, including reduced regulatory scrutiny, lower investment returns, and potential deal failures.