What is a Spac Stock? How to Buy Spacs & The Risks Involved

Spac stocks are trendy and boast big profits. But do they make huge profits, and should you invest?

A Spac stock is a special-purpose acquisition company created to acquire or merge with an existing company and bypass the traditional IPO process.

These stocks are often attractive to investors because they offer the potential for high returns. However, there are also risks associated with investing in Spac stocks.

This article discusses Spac stocks, the risks, and if you should invest.

What is a Spac Stock? How to Buy Spacs & The Risks Involved
What is a Spac Stock? How to Buy Spacs & The Risks Involved

What is a Spac Stock?

A Spac stock is an investment vehicle created to acquire or merge with an existing company. SPACs are also known as blank check companies because they have no commercial operations when they are first launched. Investors who are interested in investing in SPACs do so because they believe that the management team of the SPAC will be able to identify and acquire a target company that will be successful.

What is a Spac specifically?

A SPAC stock is a type of investment that allows investors to invest in a company without going through an IPO. SPAC stands for special purpose acquisition company. A SPAC is a shell company used for acquiring another company. The new company then becomes a publicly traded company.

The rise of SPAC investing

SPAC stocks have become increasingly popular in recent years as a way for companies to go public without needing an IPO. This route can be significantly cheaper and faster than going the traditional IPO route. In addition, it can allow a company to avoid some of the scrutinies that come with going public.

How do SPACs work?

SPACs have a duration of two years maximum to get deals done, or the company returns investors’ money and fades away. If there is a successful merger, cash is raised from institutional investors, which enlarges the pot five times more than originally listed. The newly public firm can spend this money however they choose, and the sponsor gets shares in return and typically a seat on its board.

Examples of recent Spacs

On April 13th, 2021, a new record was set when Grab, a ride-sharing, food-delivery, and digital-payment service agreed to merge with an American SPAC founded by Altimeter in a deal worth $40bn. This enabled Grab a shortcut onto the Nasdaq, thus avoiding an IPO. Another example is Lucid, a maker of electric cars.

A quick history of Spacs

The first SPAC was created in the early 1990s. However, they were not popular until the early 2000s. In 2006, $3.6 billion was raised through SPAC IPOs. This number increased to $13.6 billion in 2007. The 2008 financial crisis led to a decrease in the popularity of SPACs. In 2009, only $2.7 billion was raised through SPAC IPOs.

SPACs began to regain popularity in 2013 and have continued to grow in popularity since then. In 2020, a record $83 billion was raised through SPAC IPOs.

The Growth of SPACs

Last year, over 250 Spacs were introduced for $83 billion in the United States. Since then, things have gotten a lot quicker. Shell companies with holdings of $100 billion are expected to buy firms worth up to $500 billion in the next two years. But this might decrease due to increasing interest rates. An array of businesspeople, sports celebrities, and even Martin Luther King III’s son are among the sponsors of SPAC.

SPACs are becoming increasingly popular with retail investors, accounting for 46% of trading on Bank of America’s platform in January.

Now, the mania is spreading to Europe, where Amsterdam has become the hotbed of activity. However, there is debate in London about how to make its listing rules more accommodating for SPACs.

How do investors profit from investing in a SPAC?

Investors who invest in a SPAC do so with the hope that the management team of the SPAC will be able to identify and acquire a target company that will be successful. If the target company is successful, then the investors in the SPAC will make a profit.

The risks of investing in SPACs

There are six risks associated with investing in SPACs:

  1. There is no guarantee that the management team of the SPAC will be able to identify and acquire a successful target company.
  2. Even if a successful target company is acquired, it is not guaranteed to be successfully integrated into the SPAC.
  3. Investors in a SPAC may not receive any information about the target company until after the acquisition is complete.
  4. Information scarcity makes it difficult to assess the risks and potential rewards of investing in a SPAC.
  5. The stock price of a SPAC may be volatile. This is because the success or failure of the target company will directly impact SPAC’s stock price.
  6. There is the risk that the target company may not be successfully acquired or that the acquisition may not be completed.

Despite these risks, investing in a SPAC can be lucrative. Investors considering investing in a SPAC should research the management team of the SPAC and the target company before investing. They should also monitor the stock price of the SPAC after the acquisition is complete.

SPAC Performance

A 2021 study by Klausner, Ohrooge & Ruan found that “costs embedded in the SPAC structure are subtle, opaque, higher than has been previously recognized, and higher than the cost of an IPO.”

“Many people tout Special Purpose Acquisition Companies (SPACs) as a better alternative to an IPO for taking a company public. SPACs raise $10.00 per share from investors in their IPOs, but by the time they merge with a private company and take it public, they hold far less net cash per share to contribute to the combined company.”

“SPAC costs are borne by the SPAC shareholders who own shares at the time of a merger rather than by the companies they take public. These investors suffer significant losses following a merger, while SPAC sponsors benefit handsomely.” Source: Klausner, Ohrooge & Ruan

What happens to Spac stock after a merger?

If the buyout is an all-cash deal, the shares of your stock will disappear from your portfolio after the deal’s official closing date. The value of the shares specified in the buyout will be given to you. In an all-stock deal, the shares will be replaced by stock in the company doing the buying.

When a company initiates a buyout of another company, there are generally two ways it can go about it. The first is an all-cash deal, in which the acquiring company pays cash for all of the company’s shares being bought out. The second is an all-stock deal, in which the acquiring company exchange shares of its own stock for the shares of the company being bought out.

If you are an investor in the company being bought out, it is important to understand how each type of deal will impact your portfolio. In an all-cash deal, your shares will be bought up by the acquiring company, and you will be paid cash for them at some point after the deal closes. In an all-stock deal, your shares will be exchanged for shares of the acquiring company. As a result, you might own shares in the acquiring company instead of the company being bought out.

Which type of buyout is better for you as an investor will depend on a number of factors, including the financial health of the companies involved and the relative value of their stock.

What happens to my stock if a company is acquired by another company?

If another company acquires a company, the stock of the company that is acquired will become worthless. This is because the company has now been taken over by the other company and will no longer be publicly traded.

What happens to my stock options in a Spac merger?

The acquiring company may buy out the options for cash if you have vested employee stock options. They might also offer to replace those contracts with options of the new company of equal or greater value. If the stock options are too far out of the money, they may be canceled.

Are SPACs publicly traded?

Yes, SPACs are publicly traded. This means they can be bought and sold on the open market like any other stock. As a result, they can be a relatively high-risk investment, especially if you are not familiar with the company that is doing the buying.

How to buy Spac stocks

You can buy most Spac stocks on a stock exchange just like any other stock. Simply enter the ticker into your broker service and make a purchase. You can also buy shares in a Spac before they have even completed a merger, according to Nasdaq. When the merger is complete, the broker will update your account with the stocks and the value of your shares.

A list of 5 high-profile SPAC stocks

Here are five high-profile SPACs you can research and buy on the NYSE or Nasdaq exchanges.

  1. Apollo Global Management Inc. Ticker: APO NYSE
  2. Ares Capital Corporation. Ticker: ARCC Nasdaq
  3. Blackstone Inc. Ticker: BX NYSE
  4. The Carlyle Group Inc. Ticker: CG NASDAQ
  5. KKR & Co Inc. Ticker: KKR NYSE

Should I invest in Spacs?

In my opinion, Spac stocks have too much risk. They have no track record of earnings, and the acquisition needs to be successful within two years for any kind of payout. If the acquisition does not happen, you will get your money back but without interest, meaning you have an opportunity cost to account for.

SPAC stocks might seems like a good investment for those looking to get in on the ground floor of a new company. However, there are also some risks involved. For one, the new company may not be successful, and the investment could be lost. In addition, there is typically a lock-up period where investors cannot sell their shares, which can be problematic if the stock price begins to decline.

Conclusion

Spac stocks can be attractive for those looking for high potential returns. Naturally, there are risks associated with these types of investments. In this article, we discussed Spac stocks and some of the risks involved in investing in them. We hope this information helps you make better decisions about whether or not to invest in these stocks.

LEAVE A REPLY

Please enter your comment!
Please enter your name here