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Special Purpose Acquisition Corporations Benefit Mergers

Published August 27, 2010

Special Purpose Acquisition Companies (SPACs) can offer a number of advantages to benefit mergers–from creating more liquidity to attracting new investors.

A Special Purpose Acquisition Company or Corporation (SPAC) is a publicly-traded buyout company that raises money for the purposes of pursuing the acquisition of an existing company. SPACs can be an excellent vehicle for raising blind pool money – most of which typically ends up in trusts. The money is usually raised from the public for an unspecified merger, often in a targeted niche or industry. Individual SPACs are typically sold at an agreed-upon price per unit for one share of common stock (to be publicly traded in the future) and two warrants that can buy additional shares. A SPAC is also sometimes referred to as a TAC – or Targeted Acquisition Company.

The SPAC raises money initially and then begins searching for a private company to buy. Traditionally, many of these purchases have been in the high tech sector.  In many cases, SPACs play a crucial role in bringing exciting new technologies to the market.

Why does a company decide to go public? The primary incentive is to raise capital in support of, and often in anticipation of, a period of exponential growth. A well envisioned SPAC might be able to raise tens of millions of dollars in a short interval – sometimes within a few weeks. This influx of capital can be like a river of instant liquidity which can be a boon to the original “shell” with which the SPAC is actually merging.

Another reason for bringing in SPACs for mergers is to cultivate image. If a public company is perceived more favorably by consumers, it can soon achieve status as powerful, reliable, and established – which may attract new investors. New investors can be the lifeblood of such a merger.

Pulling off these kinds of mergers in a restricted credit environment can be challenging, but the upside might justify much of the risk. In such an environment, it might also become a resourceful move – perhaps a creative way to re-capitalize a distressed company or to ensure post-merger liquidity. Integrating SPACs  into a merger might even be a way to negotiate or re-negotiate with shareholders or a method of salvaging value lost by a previous liquidation.

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