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The boom of investor interest in SPACs has been one of the most remarkable trends in finance. So what are SPACs, exactly? And how might they appeal to travel startups looking to go public or get acquired?
A special purpose acquisition company (SPAC), or blank check company, is a shell company with no operations but that its backers create to acquire or merge with another company. The backers promise startup founders a chance to speed up and smooth out the path to an initial public offering (IPO), compared to a traditional, bank-led IPO.
“In 2020, more money was raised in SPAC IPOs than in all previous years combined,” said Jay Ritter, a professor of finance at the University of Florida who studies IPOs. “There are now close to 300 recent SPAC IPOs searching for a merger partner. I expect that most of these will agree to merge with a private operating firm and take it public during 2021.”
More than 218 special purpose acquisition companies went public in the U.S. last year, said S&P Global Market Intelligence data. Many of these specialist companies are hungry for deals, and some are hunting in the travel sector.
So we’ve put together this explainer. Below, we briefly trace the origins of the SPAC surge, cover the pros and cons of SPACs, and discuss the implications for travel startups.
What Exactly Is a SPAC?
A special purpose acquisition company (SPAC) offers young companies a way to list publicly on stock exchanges to raise capital. They promise an alternative to a traditional, bank-led initial public offering that’s quicker and more predictable for the businesses.
“Trust me” is the core pitch that a SPAC makes to investors. Backers create a blank check company, meaning a company that doesn’t make anything. Their only business plan is a promise to buy or merge with a “real” revenue-generating business.
First, the backers list their blank check company on a public exchange for a few days. Once enough investors have bought shares to meet a funding target, the SPAC starts shopping for companies to buy or merge with.
A SPAC will move fast. It usually promises to find a company within two years. If the backers don’t find a good company to merge with or acquire within two years, the SPAC gives investors back their money. If any individual investor doesn’t like the company a SPAC picked, they can also get their money back.
There are some variations on the above model, but that’s the template.
Are SPACs New?
No, SPACs have been around in various forms since at least the 1980s. But until recently, many backers were dodgy, and most of the companies choosing to IPO by SPACs were small. The factors gave the blank check companies a second-class reputation.
Yet tighter regulation since 2000 and recent promotion by well-respected financiers have made SPACs popular. Here’s a visual history of SPACs from the Visual Capitalist.
How Does a SPAC Differ From a Traditional IPO?
Most IPOs you’ve heard of have been traditional, bank-led IPOs. These involve long, complicated processes that are fraught with uncertainty.
Consider the case of Airbnb, which took this standard route to go public in December. The online travel agency worked intensively with banks for about six months to put together an offer. Banks courted investors, typically large institutional investors, such as ones running pension funds.
Like all companies following this path, Airbnb had to file documents charting its financial performance approximately a month ahead of listing on an exchange. In Airbnb’s case, many investors liked what they saw.
But sometimes investors balk instead. When WeWork published its financials ahead of its planned IPO, the company came in for wide criticism, leading the company to abandon its IPO.
Many startup founders want to avoid uncertainty and possible humiliation.
Airbnb’s underwriters gave early guidance on what price its shares might fetch. But it wasn’t until approximately the day before the listing that underwriters firmed up the share price. Many founders dislike the last-minute uncertainty on pricing, too.
What’s more, when Airbnb listed, its stock price popped, or shot up more than double the listing price. Contractural terms locked employees out of selling their shares in the early period of public trading. So workers didn’t benefit from the market valuing the company more highly than the underwriters did. CEO Brian Chesky had a notably startled reaction when he first learned what price his company was trading for on the open market while being interviewed on live TV.
So the uncertainty and long duration of the IPO process are disadvantages to traditional listings.
A SPAC does IPOs differently. Once a SPAC has gone public, it can buy or merge with a startup, giving the startup near-instant access to the cash it has already raised.
That means a SPAC’s backers can tell founders upfront what valuation the deal will place on their company and how much cash they’ll get. The process also avoids much of the hassle of an investor roadshow.
What Are Some of the Downsides of SPACs?
A SPAC can often be more costly than a traditional IPO, once everything’s calculated, according to an academic paper published in October.
A SPAC will charge fees for its service, of course. It will also typically end up with key backers taking a hefty stake in the young company. It’s common for the sponsors who set up the SPAC to get a 20 to 25 percent share of a company’s equity at a heavily discounted price.
Another downside is that SPACs don’t have the greatest track record by some measures. An analysis by the Financial Times in August found that two-thirds of SPACs launched between 2015 and 2019 that have found targets were underperforming their IPO price of $10 a share.
As noted before, “trust me” is the core pitch that a SPAC makes to investors. Many high-quality companies are suspicious of “trust me” promises. Airbnb, for example, spurned billionaire investor Bill Ackman’s offer of a SPAC-based IPO via Pershing Capital.
Why Are SPACs Popular Now?
A few factors are driving the SPAC wave. One driver has been the entry of trusted and experienced investors into the SPAC field. Another has been a string of traditional IPOs that disappointed startup founders because of bad pricing. A third factor is the enthusiasm of individual investors, who have flooded into stock-buying mobile apps like Robinhood and are eager to buy IPOs.
As we said, SPACs aren’t new, but they tended to be run by less well-known investors.
However, star investors have recently dived in. For example, consider the case of Virgin Galactic in 2019. Former Facebook executive and business TV regular Chamath Palihapitiya worked with fellow investor Ian Osborne to use a SPAC to take Virgin Galactic public. Shares in the space tourism company recently hit $33 a share, well above their $10 a share debut. The deal helped Virgin Galactic raise $720 million. The deal also alerted the travel sector to the potential of SPACs.
Bigger investors have become comfortable with SPACs. In August, well-regarded investor Greg O’Hara co-founded Go Acquisition, a SPAC that raised $500 million with a plan to target travel and transportation companies. For more context, see our article This Newly Public $500 Million Company Is Set Up to Go Shopping for Travel Acquisitions.
Go Acquisition’s biggest shareholders include Third Point Management, according to financial filings as of December 31. Third Point is a hedge fund founded by activist investor Daniel S. Loeb. Third Point has a sizable stake in MGM Resorts and Caesars.
Another factor driving the popularity of SPACs has been rising stock market volatility partly because of the pandemic. The mood of investors has shot up and down in the past year more frequently than usual.
The volatility has complicated the job of traditional IPO underwriters, who set prices with the aim of correctly guessing market sentiment. Underwriters priced IPOs too low too many times in 2020. Ritter said that companies failed to capture more than $30 billion in value as reflected in post-IPO trading. Blank check companies avoid that pricing problem by setting precise valuations ahead of time.
A final factor is the so-called Robinhood effect, named after a stock trading app that has soared in popularity in the past year. A benefit of SPACs is that ordinary investors can easily purchase shares in them, while it’s nearly impossible for ordinary investors to access traditional IPOs. That’s because banks usually set aside IPO shares for their largest customers.
So the rise of SPACs helps democratize investing in public offerings. Individual investors have more demand for IPOs than there’s supply, and SPACs could help expand the supply by speeding up the IPO process.
Which SPACs Target Travel Companies?
Several special-purpose acquisition companies have debuted in the past year with stated interests in the travel and transportation sectors. Names include Altitude, Go Acquisition, Thayer, and Virgin’s VG Acquisition.
Other blank check companies might also bet on travel. These include Altimeter Growth 1 and 2, which are co-led by Brad Gerstner, a frequent travel sector investor. In October, Richard Branson’s Virgin Group raised $480 million for a SPAC, VG Acquisition, that will target companies in several sectors, including travel. SoftBank Group, which has also invested in several travel startups via its venture arm, launched its first SPAC this month.
What Kind of Travel Companies Are Likely Targets?
SPACs keep evolving. But as of today, they tend to favor smaller companies with thin to no profits.
Classic examples include air taxi startups, which need capital to invest in upfront costs for development but which project high future growth rates. Joby Aviation, a startup that’s building an electric aircraft capable of making vertical takeoffs and landings inside cities, may seek to go public soon. If it does so by merging with a special-purpose acquisition company, it will copy similar moves by helicopter taxi service Blade last month.
One reason: Unlike traditional IPOs, SPAC IPOs appear to give companies more legal protection for issuing forecasts about their growth.
While most SPACs that have gone public recently have been on the smaller side, that may change as bigger investors get involved. Ackman’s SPAC, for example, has raised about $4 billion to buy a quality growth company. Meanwhile, the Altitude Acquisition SPAC, which intends to focus on travel, travel technology, and travel-related businesses, is looking for companies with an enterprise value of $1 billion or more with either business-to-business or business-to-consumer focuses.
When Skift recently surveyed Travel IPOs to Watch for in 2021, Traveloka, Southeast Asia’s largest online travel startup, came up as one example of a travel company reportedly considering a merger with a SPAC as a path to an IPO. It hasn’t discussed its valuation, but some media reports peg it at more than $2.75 billion. Expect other travel companies to consider SPACs, too.