A blank check company, or special purpose acquisition company (SPAC), is an alternative way for a company to go public, especially as circumstances in 2020 may make it more appealing.
The route to becoming an IPO has looked different for some companies this year, and we’re not just talking about missing the chance to ring the bell on the floor of the New York Stock Exchange.
Unpredictable volatility in the stock market starting in the first quarter during the first quarter of 2020 made market forecasts even more difficult. Moreover, in a time when many buyers and sellers are already tentative, initial public offerings (IPOs) may seem to be more of a risk to investors because they don’t have as much public financial history as other stocks in the exchanges.
That means several companies may be looking for other options for going public. Enter: the blank check company.
Although acquisitions through blank check companies were already gaining steam before this year, some of the buzziest stocks of 2020 have been the product of these mergers. In fact, some experts argue the unusual nature of the markets recently has encouraged more companies to consider blank check companies before going public.
WHAT IS A BLANK CHECK COMPANY?
A blank check company is a publicly-traded developmental stage company that has no definitive business plan. One type of blank check company is a “special purpose acquisition company,” or SPAC, whose goal is to raise funds through an IPO to finance a merger or acquisition within a determined time frame.
Some SPACs give their management teams complete discretion to purchase any type of business, while others have more specific targets concerning certain sectors or industries. However, the SPAC doesn’t notify its investors what it will buy until the acquisition.
SPACs emerged as an alternative route for a company looking to go public. In a traditional IPO, the company undergoes an extensive process dealing with the U.S. Securities and Exchange Commission (SEC). If it sells to a SPAC, the process is shortened to a few months with less SEC involvement. The SPAC itself goes through the SEC’s registration process for an IPO when it first offers its own shares to public investors, which is typically less demanding than a full S-1 registration statement for an IPO.
WHY ARE BLANK CHECKS SO IN VOGUE?
Yet if the use of blank check companies was becoming a trend in 2019, the coronavirus pandemic accelerated it. As COVID-19 contributed to wild swings in the market in the first two quarters of 2020, a standard IPO would have been victim to erratic changes in the price of its shares.
On the other hand, SPAC acquisitions are pre-negotiated, stabilizing the price regardless of market volatility. This offers a liquid yet more reliable option.
WHICH SPACs ARE MAKING WAVES IN 2020?
One of the first SPAC deals on investors’ minds this year was the agreement between sports betting company DraftKings and Diamond Eagle Acquisition Corp., which merged in December 2019. By April 2020, DraftKings went public with a market value of $6 billion.
In another notable blank check deal, electric truck developer Nikola announced plans to merge with the SPAC VectoIQ Acquisition Corporation in March. Nikola’s stock began trading on June 4, and by June 9, the shares had more than troubled.
Yet blank check companies are doing more than just becoming more visible; they are also breaking records. In July 2020, hedge fund manager Bill Ackman raised $4 billion in an offering for a SPAC called Pershing Square Tontine Holdings, the largest SPAC offering in history. Ackman says the deal is part of a “unicorn mating dance,” meaning the company aims to merge with a privately-owned company with a multibillion-dollar value.
Meanwhile, the blank check company Churchill Capital Group III announced an $11 billion merger with the healthcare company MultiPlan, Inc. According to MultiPlan parent Hellman & Friedman, the July agreement is one of the largest SPAC mergers ever.
WHAT DO SPACs MEAN FOR INVESTORS?
With the success stories of 2020, share prices for upcoming SPACs may be influenced by rising investor optimism. Still, those initial investors in SPACs are not investing in Nikola or DraftKings; instead, they are investing in the idea that the blank check company will eventually merge with a promising company. Once the sponsor finds a potential business deal, the investors can decide if they support the deal through a proxy vote.
If the SPAC fails to find a suitable acquisition candidate before the end of the predetermined time frame (usually two or three years), the money is returned to investors. However, investors may not appreciate the duration needed for their investment to see activity.
As this year’s trends continue, investors and companies may view the potential of blank check companies for their opportunities and evaluate the associated risks that come with any investment decision.