The Special Purpose Acquisition Company (SPAC) Craze: Old Wine In New Bottles

Market analysts said early on this year that 2021 would be huge for the special purpose acquisition company (SPAC). And so far, we'd have to agree. SPACs are basically "shell" or "blank check" companies that exist in the public markets solely to raise investor funds and then acquire existing private companies. A SPAC then becomes a platform for multiple acquisitions in a targeted space.

We were recently approached by a prospective client who was interested in developing a SPAC. But when we got in touch with a friend at a major investment bank, we were told that his investment banking team was already too busy working on in-house SPAC deals. Just speaking with, let alone taking on, prospective new clients was out of the question.

Now that's a frothy market for you. And in fact this year has borne that out. SPACs have come under further scrutiny as their calculations of proposed interest income often ended up being way off the mark, calling into question other projections.

After taking a 30,000-foot view at SPACs, it occurs to me that this latest fad is nothing more than old wine in new bottles.

There is really nothing new about buying a public shell company as a way of tapping into the public equity markets with all of their advantages, and often, accompanying disadvantages. This has been going on for decades. And the public markets do not work effectively to drive value for all businesses--they are not a panacea.

Neither is there anything new about a roll up or consolidation play. In that classic maneuver, a business owner acquires and merges multiple smaller companies in the same industry, consolidating them into a larger company. At their core, that's what SPACs are--successive acquisitions to effectively harness economies of scale in a given market.

The central difference is that a SPAC could initially be seen as a fuss-free way for a company to enter the public sphere without the hassle of the potentially drawn out process that leads to an initial public offering (IPO). SPACs seem to offer owners options for a quicker and more efficient path to going public. But if they come with unrealized projections, they may not be a solid investment after all.

Owners who are interested in SPACs will have to rely heavily on effective managers while efficiently integrating and operating the acquired businesses to drive profits and value for investors. Clearly though, that's easier said than done, if leading investment banks are too busy to speak with folks interested in getting in on the SPAC craze.

Instead of following frothy trends, we'd suggest to our clients that SPACs aren't the only way to get to the public markets. A well-implemented rollup or consolidation play always makes excellent sense and can be far more dependable for investors.

Business and Legal Help, At the Ready

You're a capable business owner who wants to take things to the next level and SPACs sound like your golden ticket. Don't move too quickly. We'd suggest a measured approach and a discussion with a legal professional who also boasts some serious business acumen. Our team fits that bill and is always ready to give you an objective viewpoint that's informed by real-life know-how. Reach out to learn more about how we can help you make the most of opportunities for business growth.

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Benjamin Calkins

Benjamin Calkins

Ben Calkins is a well-educated, top-rated, and highly experienced business law attorney.

Ben Calkins is an honors graduate of Harvard College and the University of Michigan Law School. After law school, he clerked for a Federal Judge before joining one of the World’s largest law firms, Squire, Sanders & Dempsey. Mr. Calkins has also worked at, and been a partner in, several of the most prominent “old style law firms” in the World.