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3yrs ago Private Equity corpgov.law.harvard.edu Views: 418

Posted by Andrew R. Brownstein, Andrew J. Nussbaum, and Igor Kirman, Wachtell, Lipton, Rosen & Katz, on Saturday, August 22, 2020 Editor's Note: Andrew R. Brownstein, Andrew J. Nussbaum, and Igor Kirman are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum co-authored by Mr. Brownstein, Mr. Nussbaum, Mr. Kirman, and other members of the firm, including Matthew M. Guest, David K. Lam, and DongJu Song.

The special purpose acquisition company (“SPAC”) is on the rise. A surge of offerings by a series of high-profile SPACs in the last several months has led to record levels of capital being raised by SPACs in 2020. As SPACs become a routine part of M&A processes, private company sellers and their shareholders are being presented with new opportunities that require informed and creative navigation.

I. Background

A SPAC is a company formed to raise capital in an initial public offering (“IPO”) to finance a subsequent merger or acquisition within a time frame specified in its charter, typically two years. The target firm, which must not yet be identified at the time of the SPAC’s IPO, becomes public as a result of the transaction (often referred to as a “business combination” or a “de-SPAC transaction”). So far this year, a total of $30.4 billion of capital has been raised by SPACs in over 75 IPOs, a marked increase from the previous record, set in 2019, of $13.6 billion raised in 59 IPOs. The average size of SPAC IPOs has also grown from approximately $230 million in 2019 to more than $400 million so far in 2020.

Along with larger offering sizes, a greater number of SPACs are being established by prominent former public company executives with the goal of acquiring a target in the executive’s industry or a related industry. A number of large, well-regarded financial institutions and private equity firms are also sponsoring SPACs. Not coincidentally, a growing number of deal announcements by SPACs have been well received by investors, and many companies that have gone public through a de-SPAC transaction have maintained stock prices well above the SPAC’s IPO price. These trends have helped SPACs become a fixture of the current M&A environment and reduced their historical associations with financial underperformance and risk.

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