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The “blank check” acquisition funds known as special purpose acquisition companies, or SPACs, have raised more than $30 billion so far this year, versus $13 billion in all of last year. Can they keep it up? In today’s newsletter, DealBook spoke with some of the most plugged-in SPAC bankers and lawyers on Wall Street, and they cited three factors driving the boom:
1️⃣ Valuations are soaring for popular SPAC targets
“The pipeline is heavily weighted to technology and growth companies,” said Niron Stabinsky, who leads SPAC deals at Credit Suisse.
SPAC offerings will be “incredibly active post Labor Day,” said Paul Tropp, the co-head of Ropes Gray’s capital markets group. That’s part of a “significant uptick” in listings expected to hit the market before election-related uncertainty sets in: Yesterday, the tech firms Asana, JFrog, Snowflake and Unity all filed to go public.
2️⃣ SPACs aren’t just an alternative to traditional I.P.O.s
“SPACs have become a new way of doing an M.A. deal,” said Jeff Mortara, the head of equity capital markets origination at UBS. A merger with a SPAC allows the target company’s investors to retain a stake while gaining liquidity, and deal negotiations can be done directly, secretly and quickly. SPACs typically have two years from their I.P.O. date to complete a merger.
3️⃣ The flood of money to SPACs means better terms for targets
“Everything is negotiable,” the venture capitalist Bill Gurley wrote in a detailed case for SPACs on his blog. As competition between SPACs intensifies, “sponsors are continuing to negotiate deals that look better for the companies they buy,” he said.
Why? Some SPAC sponsors are open to a smaller “promote” — the stake the sponsor gets essentially free after a merger. (Traditionally, a sponsor takes 20 percent.) SPACs also award warrants to the vehicle’s investors, which give them the right to buy larger stakes in the merged company at a discount; these are becoming less dilutive as sponsors shift their terms to be more favorable to the target company.
Mr. Gurley predicted that SPAC fund-raising this year could be four times higher than the previous record, set in 2019, implying another $20 billion or so to come. The standard-bearer of a new approach for SPACs is the $4 billion fund sponsored by Bill Ackman’s Pershing Square, the largest to date.
— Lauren Hirsch
Article source: https://www.nytimes.com/live/2020/08/25/business/stock-market-today-coronavirus