- WeWork’s recent SPAC announcement begs the question, what is a SPAC and what are the benefits of using one?
- A SPAC is a public listed corporation set up specifically to raise money, which will then be used to buy or merge with an existing private company.
- Jonathan Price, investment expert for the flexible space industry, explores the role of a Special Purpose Acquisition Company and how it can help companies go public.
In my recent three-part article about valuation, I referred to the media’s favourite coworking company, WeWork, on a number of occasions. The latest development in the saga of WeWork’s attempt to join the public market was the announcement in March that agreement had been reached for the company to merge with BowX, a SPAC set up by Vivek Ranadivé, founder of the California-based software group Tibco, at a valuation of $9bn.
Leaving aside the matter of the valuation for a moment, what exactly is a SPAC or Special Purpose Acquisition Company?
A SPAC is a public listed corporation set up specifically to raise money which will then be used to buy or merge with an existing private company, and by this method making the private company go public.
The idea of doing an IPO for a new company which has no business of its own, but wants to raise money to take over another business, has been around for a very long time, since the 18th century at least when “a company for carrying out an undertaking of great advantage, but nobody to know what it is” was floated on the London market.
In the USA the concept is believed to have been first used in 1881 by Henry Villard who sent out a prospectus for a “blind pool,” stating that he would reveal “the exact nature” of his plans 90 days hence. Like his 18th century English predecessor, he was successful in raising the capital he needed to take over his target, as investors were intrigued to find out what it was. In fact, the offer of shares was fully subscribed in under 24 hours, despite the complete lack of logic in investing in the unknown.
It seems that the investors’ love of mystery cancelled out their reluctance to buy “a pig in a poke”.
The deciding factor in persuading investors to back Henry Villard was the fact that he was a big celebrity in late 19th century New York. This celebrity factor applies just as much today, with the most successful sponsors of SPACs being those who are most famous.
They don’t have to be famous for investing, they just have to be famous.
Celebrity sportsmen or media personalities have successfully sponsored SPACs, despite the absence of any obvious investment expertise. To be fair to Henry Villard, he was a successful businessman and entrepreneur having risen from being a journalist to being the owner of several major newspapers.
So, the first moral of this story is that if you want to benefit from raising money through a SPAC, it helps a lot if you know someone really famous who would be willing to front the deal for you.
Why would the owners of the private company which is the target of the SPAC agree to be taken over by the SPAC?
There are several supposed advantages in going public this way, rather than via an IPO. One of the key advantages is that the documentation required for the merger of the SPAC and target, sometimes called the de-SPAC, is both less demanding and thus less expensive, and more flexible than IPO documentation, allowing the sponsor to make forward looking statements for example.
I should add that the SEC has become a little concerned about some of the recent de-SPACs and has issued an open letter warning prospective sponsors that their understanding of the law related to SPACs might not be in line with that of the sponsors, so it pays to be a bit cautious.
As we know, WeWork’s planned IPO in 2019 collapsed in ruins once the company issued its S1 prospectus for the flotation and investors got a chance to see the calamitous nature of its finances as well as the delusions of grandeur of its management. Going public through a de-SPAC, albeit at a much lower valuation and shorn of its previous hubris, should provide a less demanding route than the IPO.
How about the investors in the SPAC, what is the deal like for them?
I have to confess that I am not a big fan of investing in SPACs, at least not in the medium to long term.
For a short-term trading position, what we used to call a ‘punt’, it doesn’t matter what you invest in, be it Bitcoin, NFTs, penny stocks or Cadbury Creme Eggs, an old favourite for bored London bond traders on slow trading days – because I like to know what I am investing in and I am not a follower of celeb culture.
I am also not a fan of SPACs because frankly they are weighted heavily in favour of the celebrity sponsors, who get into the deal at a small fraction of the price that ordinary investors have to pay, so it’s rather an expensive way to invest in the complete unknown.
Could a coworking/serviced office company use a SPAC to go public?
In principle, yes, there is no reason why not, and now is a good time to make such a move. Although the rules governing SPACs in the USA are in general quite flexible, and those in the UK should soon be brought into line with the American rules, one of the firm rules is that the de-SPAC has to occur within two years of the SPAC’s initial listing on the stock market, so the clock is ticking. If the money is not invested within the two-year limit, it has to be returned to the investors and no-one likes to have to give money back.
The last two years have witnessed an explosion in the number of SPACs being launched with the record number of 2020 being surpassed in just the first quarter of 2021. This means that there is a record amount of SPAC money out there looking for good targets and, as a result, it has become a seller’s market.
If you have a business that is large enough to be of interest to a SPAC sponsor and want to go public, with all the attention and additional paperwork that a public listing involves, now is the time to start negotiations. Even if the business is not big enough by itself, you could perhaps find another firm in the industry that would be willing to discuss joining together for the purpose. It is after all a good way to get someone else to pay the costs of going public.
What kind of valuation could you expect?
Judging by the $9 billion agreed value for WeWork, which despite being less than one fifth of the proposed 2019 IPO value, is still rather on the high side, you should be able to get a nice premium over what you could expect from any other type of exit.
For the purposes of a SPAC takeover, the bigger and more ambitious you are, the better. Happy hunting.
