Anatomy of Special Purpose Acquisition Company (SPAC) Transaction

Here we model a live SPAC deal to illustrate the details of a SPAC transaction. We show that the SPAC structure results in severe dilution of the value of SPAC shares: post-merger share prices fall, and price drops are highly correlated with dilution or cash shortfall. We show that SPAC investors bear structural cost of the dilution and pay for companies they bring public. SPAC creates substantial costs, misaligned incentives, and losses for investors who own shares at the time of SPAC mergers: SPAC shares tend to drop by one third of their value or more within a year following a merger

Only those who buy shares in SPAC IPOs and either sell or redeem their shares prior to the merger do very well. We demonstrate that IPO investors who are pre-merger shareholders should exit at the time of the merger, either by redeeming their shares or selling them on the market. Investors that buy later and hold shares through SPAC mergers bear the costs of the generous deal given to IPO-stage investors. Sponsors promote, underwriting fees, and dilution of post-merger shares caused by SPAC warrants and rights all transfer value from SPAC investors to pre-merger IPO investors and sponsor. Modelling a transaction shows that Sponsor has an incentive to enter a losing deal for SPAC investors if its alternative is to liquidate.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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