Special Purpose Acquisition Companies (SPACs) are not a new species (going back to the 1990ies, with the blank check companies of the 1980s as predecessors), but one of the trendy topics of 2020. As per today, 235 SPAC IPOs raised 46% of the aggregate funds raised in IPOs in the USA this year. You might not be familiar with Acquisition V, Spartan Acquisition II, 10X Capital Venture Acquisition or Far Peak Acquisition. However, just these four entities raised a combined USD 1.3 billion in initial public offerings since September 2020. On top of this, Bill Ackman's Pershing Square Tontine Holdings raised a record-breaking USD 4 billion in July, now waiting to deploy its firepower of USD 5 to 7 billion on a unicorn. SPAC veteran Sir Martin Franklin believes that the current frenzy will "end badly”, although he has plans to raise another SPAC himself.

A SPAC changes the traditional process of going public: first it raises funds in an IPO to put them in a trust account, then it searches for a business to acquire, which, at the closing of this so-called De-SPAC transaction, becomes public without going through a traditional IPO process. Typically, if a SPAC is not able to complete a De-SPAC transaction within 24 months, it will hand funds back to investors, unless extended by a shareholder vote.

Are SPACs a blank check or blind faith? This is for the investors to decide. However, there are a few considerations for M&A practitioners going into 2021:

• First, a SPAC is a type of buyer with specific characteristics: While being similar to private equity, very focused on fundamentals and with managers often taking a stake in the acquired business, SPACs have no time limit on their investments. Therefore, some position themselves closer to strategic investors. Being bought by a SPAC, however, means the transaction will face public scrutiny, with all the ups and downs that come with the spotlight of the markets. Not without reason, SPAC transactions have been described as a hybrid between traditional M&A and an IPO.
• Second, not every SPAC is a suitable dance partner for every business. Counterparties should study the (constantly evolving) economics of a SPAC in detail to assess transaction costs, impact on the post-closing cap table and governance going forward. The need for third-party capital and the shareholder redemption mechanics may have an impact on deal certainty and speed of execution. Further, size matters, since SPACs need to deploy about 80% of their capital in a De-SPAC transaction, and typically combine with a business that is two to four times the size of the funds raised by the SPAC. As a consequence, smaller targets may not be suitable candidates for increasingly larger SPACs, unless combined with others.
• Third, the financial firepower of SPACs comes with a time limit. On average, SPACs have deployed their capital within 15 months and historically, only a fraction of SPACs has liquidated without completing an acquisition. Given that the number of suitable assets is not indefinite, the more than 200 SPACs currently seeking suitable targets will be under increasing pressure to close deals in 2021.

While it is too early to judge whether SPACs are here to stay as a third path to public markets in the long term, as venture capital veteran Bill Gurley (not without self-interest) suggests, they will definitely have an impact on the 2021 M&A landscape.