SPACS: eight key points to consider. Glorious platforms for liquidity and fundraising
A SPAC is a special purpose acquisition company. It's a publicly traded company set up with the first goal of buying an operating firm or other entity. SPACs have several key advantages that are related with the liquidity and standing of their publicly traded stock, together with: a means of shareholder value realization/shareholder liquidity, an option to use public stock as acquisition currency, a device for compensation and incentive, a means to provide liquidity to shareholders, access to broader financing options and more. And naturally, status! For full disclosure, we could or may not launch a SPAC within the coming months.
In January alone, SPACs completed around $26 billion in share sales, serving to fuel $63 billion of IPO proceeds worldwide this yr, more than 5 occasions the proceeds from January last year. SoftBank Group, Social Capital, The Gores Group, PE firm Thoma Bravo and plenty of others have all raised money by SPACs in the past few weeks, capitalizing on final year’s report fundraising. Over 200 firms accomplished IPOs in January.
However, not all SPACs are equal, and their constructions should be considered caretotally given the wide range of parties with a potential curiosity within the equity of any SPAC, together with buyers, funding bankers, sponsors, acquisition groups, acquisition targets, acquisition goal shareholders, institutional funds, hedge funds, speculators, offshore (or even onshore) short sellers, attorneys, potential lenders and more.
Critical items to consider when evaluating a SPAC at any time embrace:
Stock options or warrant overhang
Stock research coverage
Quantity and liquidity
Shareholder base energy
Lessons of stock and sophistication energy
Credible institutional holders
Debt and debt energy
Need for future financings
Stock Options or Warrant Overhang
A robust stock price exists when a comparatively broad range of shareholders believes that the stock’s worth will appreciate in the future. Thus, when a shareholder chooses to sell his position within the firm, many different shareholders are involved in shopping for the stock. Over the long term, if massive, professional institutional shareholders (such as Fidelity, Capital Group Firms, Vanguard, etc.) are unwilling to or bored with shopping for an organization’s stock, its price is likely to crumble over time. Some firms with world consumer name recognition and highly effective manufacturers are able to get away with minimal institutional shareholdings, but they are few and much between.
Firm issued stock options, typically speaking, might be dilutive to stock value. In some cases, such as incentivizing key employees, the ability of an incented workpower is likely to be reflected in a powerful stock price. Alternatively, a large number of outstanding warrants and options presents two key points for stock worth: (1) The dilutive power of an excessive number of options cannot be overstated. Excessive stock option issuance can cause downward pressure on stock price. (2) Many professional and institutional funds as a matter of coverage will merely not purchase the stocks of publicly traded firms which have excessive warrant or option "overhang." This means that this critical investor base is potentially excluded as a core and strong part of the corporate’s shareholder base.
Ira Kay, a prominent compensation consulting professional, puts it this way: "Extremely high levels of overhang are bad in bull or bear markets." A share of more than 20 is considered high while 1 to 2 % is moderately low, he says. A great balance is round 10 to 15 percent. Nonetheless, there are business variations. The sweet spot for utility or consumer items companies is 6 %, but it’s 15 percent for tech and health care, which consists of the biotech sector.
SPACs are, generally speaking, finishing or contemplating larger acquisitions, in part, in order to reduce the impact of risks associated with warrant overhang issues.
That being said, it is necessary to consider these issues in conjunction with other factors when making evaluations of SPAC equity. Some corporations with bigger overhang could carry out well, especially after they have had a depth of institutional and retail investors throughout a number of markets or after they have had a smart PE backer.
Potential Options: "Potential" solutions are all subject to regulatory necessities of their respective jurisdictions as well as financial implications that ought to be reviewed with an funding banker and equity professionals. Finishing a large acquisition might be very helpful. Other options include providing the issuer with the ability to buy extreme options, probably prior to initial issuance. Over time, issuers might also consider the usage of excessive balance sheet cash or debt to repurchase overhang options. Issuers can potentially, and subject to regulatory hurdles, work on monetary buildings that offset excess stock option issuance equivalent to potentially issuing offsetting securities topic to regulatory and other considerations. Of course, merging with another public company or going private could also be potential options, particularly for these corporations that will wrestle to lift further rounds of equity. All of those considerations are financially delicate and topic to regulatory obligations in the jurisdiction of the stock market, and thus require strategic consultation with skilled and sophisticated bankers, monetary advisers and lawyers.
Equity Research Coverage
Stock research is a vital informative or suggestive software in helping stock buyers kind opinions on stock price potential. Equity research reports are also an necessary device in serving to a broad group of investors develop interest in and ultimately buy a stock, assuming they agree with potentially positive analyst recommendations. Importantly, good stock research attracts long-term institutional traders, one of many bedrocks of robust, long-time period stock value performance. Stock analysts thus play a critical function in stock liquidity and finally stock price. Corporations that don't have any research coverage is likely to be perceived as risky since they could have more limited shareholder bases and more limited liquidity. To make use of an instance that will probably be deliberately repeated all through this writing, imagine watching the ten,000 shares that you simply owned yesterday at $10 every have a price as we speak of $5 because one other shareholder sold his 10,000 shares for $5 and not a single institutional investor stepped in to buy at the higher price. What if they did not step in because no equity analysts write research on the company?
Potential Solutions: Companies that would not have good research coverage should proactively have interaction the financial community with timely and well thought out communications that designate their strengths (and risks) in a way that is compelling to buyers generally, and equity research analysts in particular. Solid investor relations efforts combined with seasoned and skilled CFOs will be very helpful in this regard.
Trading Volume and Liquidity
While a separate situation from shareholder distribution, trading quantity/liquidity and shareholder distribution are closely intertwined. Many smaller SPACs endure from a lack of liquidity and trading volume because of the lack of well-distributed public ownership of their shareholdings and/or a lack of a strong institutional shareholder base. Stocks with significant volume and liquidity, generally speaking, have higher value stability than stocks with limited quantity and liquidity. The lack of liquidity might potentially be a mirrored image of a lack of interest in the stock or fears about its stock price. Stocks with limited trading quantity and liquidity are thus potentially subject to very significant price swings, and this is the case with some smaller SPACs. This presents the identical challenge because the equity research problem: imagine watching the 10,000 shares that you owned yesterday at $10 each have a value right this moment of $5 because one other shareholder sold his 10,000 shares for $5 and not a single "buyer" stepped in to purchase on the higher price.
Forum Role: Participant
Topics Started: 0
Replies Created: 0