WTF is a SPAC?

By Tim Peterson

The media industry has a new acronym to add to its lexicon: SPAC. Short for “special purpose acquisition company,” the term has turned into a trend as an increasing number of companies, including media organizations, are turning to SPACs as a non-traditional means of taking their companies public.

In December, Group Nine Media formed its own SPAC, which went public on Jan. 15 and is expected to eventually subsume the media company that spawned it and acquire other media companies. BuzzFeed is reportedly considering also taking the SPAC route to going public, according to The Wall Street Journal.

With SPACs set to become more commonplace in media along with other industries, here is a primer on this unusual path to going public.

Basically, a SPAC, or special purpose acquisition company, is one way that a company can go public and begin selling shares on stock exchanges in order to raise money. Technically, SPAC refers to the company going public, whereas SPAC IPO refers to the means of going public via a SPAC.

What is different between a SPAC and a traditional IPO?

A SPAC flips the traditional IPO process on its head in that the company that initially goes public — the titular SPAC — is not so much a company as the promise of one. “The SPAC itself has no assets. It is just a shell company,” said Nemmara Chidambaran, professor of finance and business economics at Fordham University.

How does a SPAC IPO work?

In a traditional IPO, a private company files to go public and then goes through a roadshow to line up investors for its initial offering and determine what the price of its shares should be. In a SPAC IPO, a shell company — nicknamed a “blank-check company” — goes public with the pledge to investors that it will eventually acquire an actual company and, once that happens, become a traditional company.

“Investors are giving the money as if it’s a blank check where you don’t know what you’re buying. The reality is you know the reputation of some of the people involved [in the SPAC], but you don’t know what eventually they will propose buying: what the company is and what the terms of the deal will be,” said Jay Ritter, professor of finance at the University of Florida.

The SPAC is commonly founded by a private equity investor or a former industry executive. This founder, otherwise known as the SPAC sponsor, has typically targeted a specific industry, like media, so that the SPAC’s shareholders — which can range from institutional to retail investors — have a sense of what they are investing in. Then the SPAC gives itself usually two years post-IPO to find a company in that industry to acquire using the money raised from the investors.

Once the acquisition happens, the SPAC becomes a traditional company and often changes its name, usually to the name of the company it acquired. If the SPAC cannot find an acquisition target in the set …read more

Source:: Digiday