This week electric vehicle start-up Arrival announced a deal to become a public company — valuing the stealthy British company at a lofty $5.4bn.
Like many other companies this year, Arrival isn't going public via the traditional IPO route where you hire bankers, they talk to people and allocate shares in the deal. Instead Arrival is merging with a SPAC — a Special Purpose Acquisition Company.
SPACs are essentially a big blank cheque, and to say they are booming this year would be about as understated as saying 2020 has been a weird year. According to data from SPAC Analytics 187 companies have gone public by merging with, or being acquired by, one of these blank cheque companies, raising more than $66bn in the process — not far off the $76bn raised in the traditional IPO process.
Why use a SPAC?
For the companies going public, SPACs seem like a great idea. They just have to negotiate with one party and they don't have to go through the formal rigour of a roadshow. The managers of the SPAC probably aren't complaining either, they get fat fees for finding deals and usually some upside if the deal goes well.
What's less obvious is why investing in SPACs has become so popular. Giving someone a blank cheque to go and buy a company is a good way of saying you are fresh out of ideas yourself. Fewer investors doing due diligence, and a big incentive to get deals done quickly is usually not a great recipe.
