Carol Roth recently posted her opinion about SPACs and why she thinks they are a flawed concept on LinkedIn. I thought it was really interesting and wanted to share it with you. I had no idea what a SPAC (Special Purpose Acquisition Company) was until I worked on a resume for a client who was advising a few of them. (Carol’s post was long so I have pasted the text below.)
The entire concept of a SPAC is flawed because it eliminates the benefits of the traditional IPO process. A SPAC (Special Purpose Acquisition Company) is an entity that raises capital in the public markets for the purpose of acquiring one or more operational companies and merging them into the public vehicle. They are sometimes referred to as “blank check companies”, since money is raised for the SPAC usually without knowledge of what specific companies will be acquired.
Most of the time, the target acquisition by a SPAC is a private company, which goes to the heart of the issue.
If a private company is suitable to come public, it receives substantial benefits by going through an IPO process. The IPO process introduces the company to investors, builds out a diversified investor base interested in the company and its thesis and obtains research coverage. If successful, the IPO process should create more demand for the company’s stock, both at the time of IPO and in the future, assuming the company delivers.
The only reason to sidestep this valuable process is if the company can’t hold up to scrutiny by investors and analysts. If so, it shouldn’t be a public company. So, companies that choose the SPAC merger route instead of an IPO to get public are, by default, usually less suitable to be public. This is a key reason why SPACs fail– the thesis behind them is flawed.
(Not to mention adding an extra layer of costs and fees on top of a public company process that is already expensive and sometimes questionable ethics of the “promoters” behind them.)
Photo by Stephen Dawson on Unsplash
