25 years: Capital markets
In this video, Rupert explains the differences between the SPAC merger route to a public listing and a traditional IPO and analyses the pros and cons - and whether the SPAC merger route does in fact provide a better alternative.
In this video, Rupert explains the differences between the SPAC merger route to a public listing and a traditional IPO and analyses the pros and cons - and whether the SPAC merger route does in fact provide a better alternative.
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9 mins 22 secs
In this video Rupert looks at the key differences between coming to the public markets via a merger with a SPAC and via a traditional IPO. Some of which include speed, execution risk and valuations.
Key learning objectives:
Identify the differences between a traditional IPO and a SPAC merger
Explain each of these factors in detail
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There can be a lot less execution risk following the SPAC merger route to a public listing. The SPAC has already IPOed and raised funds before discussions even commence with the target company. And provided investors are supportive of the merger, the terms of which have, as mentioned, been negotiated privately in advance, once the merger has been announced there is a relatively low risk of failure. For a traditional IPO on the other hand, success is very dependent on the success of the public book build, which is conducted right at the end of the process over several days and is therefore subject to considerable market risk - and can fail at the last moment through no fault of the company.
The fees and other costs associated with a SPAC merger can make it a more expensive route to the public markets than a traditional IPO. The bulk of the costs associated with a traditional IPO are the banks underwriting fees, which in the US are usually 7 per cent of the amount raised in the IPO. A SPAC will only pay a 2 per cent underwriting fee on the SPAC IPO proceeds raised and 3.5 per cent on the money raised in the PIPE - so the cost of this capital is lower than the cost of the equity raised in a traditional IPO.
In the US, because the de-SPAC is regarded as a merger rather than an IPO, management projections are allowed to be provided to investors. Because of this - and because of the increased competition created by the currently large number of SPACs looking for assets, it can be argued that a better valuation for the company can be achieved than would be the case via a traditional IPO. The price discovery exercise associated with a traditional IPO has been tried and tested over many decades and arguably provides a valuation that is more reliable over the longer term.
Because of the current market appetite for investing in companies coming to market via a SPAC merger, and because of the ability to market using management projections, a private company may be able to successfully come to market earlier in its lifecycle - and may be able to raise a greater amount of equity funding - than would be the case following a traditional IPO. On the other hand, the attractiveness of the SPAC structure for investors interested in trading opportunities such as hedge funds can lead to a share register which is less reliable than would be the case for a public listing via a traditional IPO.
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