SPACs provide companies with another tool to ensure future liquidity and create valuable shareholder returns. But if you are considering this route over an IPO, there are some things you need to keep in mind to ensure a smooth process.
Drew Hamer, Chief Financial Officer at Velodyne Lidar, Inc., joins the show to explain how special purpose acquisition companies (SPACs) work and why they are here to stay.
How Does a SPAC Work?
A SPAC, or a Special Person Acquisition Company, works a lot like a merger. A SPAC is an entity that was created with simply cash. It takes the money and puts it in a trust so that the investors can’t lose their money.
There is also a small group of people who lead with a responsibility to merge that entity into another company that is an operating company. They embark on a process of evaluating different operating companies and determining one that would be a good fit for the funds that they have in the trust.
Then they start a merger discussion with that company. To decide if it would like to merge and become fully funded with the capital that is in SPAC.
Why Go the SPAC Route?
Why should you bother going the SPAC route, rather than the traditional IPO?
When you’re looking at evaluating an IPO versus a merger or other options, the beauty of the SPAC is that it provides you an opportunity to do things differently than when embarking on a traditional IPO.
First, it allows you to talk to the investors. Through the SPAC, you’re able to talk to people about what the future looks like for the company, and why this investment would be beneficial for all the parties involved.
Whereas with a traditional IPO, you would work with a sell side analyst, they would look at your financial statements, and then put together a model based on those historical financial statements. Then they go out and talk to investors and get them interested.
If everything is moving, and you have multiple years of high growth, and that growth is expected to continue, then a traditional IPO may be right for you. But if you’re just getting started, or maybe have come off of some rocky times, the SPAC route may be right for you.
What You Need to Know About the Future of SPACs
As SPAC becomes a more commonplace type of transaction, it’s clear that it’s here to stay. But what do you need to know if you’re someone that may be considering SPAC over a traditional IPO?
It’s really just being thoughtful about understanding the SPAC. Reading up on the different stages of how a SPAC works, and being careful to understand that you are embarking on something a little more outside the conventional standard.
If you have a more traditional business that’s been growing, and you want to wait a few years before going public, a traditional IPO may be the right decision. But if you’re looking for something a little different, that perhaps offers a bit more flexibility than a traditional IPO, a SPAC may be the right move for you.
For more interviews from the CFO Weekly podcast and to learn more about the future of special purpose acquisition companies (SPACs), check us out on Apple, Spotify, or your favorite podcast player!
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