Opportunities and Risks When Investing in SPACs


Opinions expressed by Entrepreneur the collaborators are his.

A SPAC (Special-Purpose Acquisition Company), which can also be called a “shell” or “blank check”, is incorporated into the stock exchanges with the aim of obtaining investment through public offerings with the subsequent confluence with an existing one. . private company. These entities are administered by the SEC (Securities and Exchange Commission in the United States).

As a general rule, a SPAC must raise capital and acquire this or that company within 24 months. After this period, investors will recover their funds. These entities exist in order to make it easier for non-governmental companies to attract investments, with the minimum time and effort, so that the listing process of the Initial Public Offering can be ruled out.

SPACs appeared in the 1990s and gained popularity in 2020 when investors had a stake. In 2019, more than $ 13 billion was accumulated, but in 2020 this figure increased to $ 83.3 billion, with the participation of more than 50% of US entities that were officially listed on the stock exchange. During the first quarter of 2021, the figure had risen to $ 96 billion, and among the listed companies, there were AdTech companies that showed significant success.

Let’s take a closer look at the issue of SPAC companies and find out what benefits they have, especially for AdTech owners and partners.

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Benefits

Those companies that choose to be included in public listings through SPAC have priority over the traditional IPO listing process.

First of all, the solution involved in a SPAC is saving time and the whole process can be completed in a few months, while a traditional IPO requires more than a year. This is due to the fact that there are fewer requirements for blank check companies and SPAC shares can be acquired by the general public before a merger / acquisition. Other than that, the IPO process is not an easy path: it requires the resolution of many issues related to legal issues, marketing issues, and accounting details. In addition, there is no guarantee that the desired capital will be obtained.

In addition, the insecurity and fragility of the market caused by the Covid-19 pandemic caused many companies to go the SPAC route. It helped them set high stock prices and maximize funds, as well as maintain the sustainability of stock value. In most cases, fictitious companies are usually controlled by experienced investors who know the details of private equity, and therefore business owners do not have to worry about the next acquisition or convergence process. Special trust funds guarantee the share capital of public investors until the merger. If the elimination is completed, these funds divide the share capital between the public agents.

Vulnerabilities

Investors in Shell companies can also face many risks. There is no guarantee that a merger will occur as expected or that it will occur at all. Some SPAC companies do not have adequate control and disclosure and this can cause problems with investments, for example, leading to fraudulent capital expenditures.

There are no overheads such as commissions or salaries for management staff before the acquisition or confluence occurs, so company and team executives are not always motivated to succeed. In addition, there is also no basis for competing interests because it is restricted for executives to join any party affiliated with privileged persons unless shareholders recognize such a merger.

Revenues generated by SPAC companies may seem much lower than expected as the hype gradually subsides. According to Goldman Sachs, the shares of at least 70% of the IPOs fed by fictitious companies were worth less than $ 10 each.

Many SPAC companies are often combined with companies that need mass financing and do not have specific financial projections. In such cases, a SPAC is the only way to attract capital as risks and possible speculation increase.

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AdTech

Despite the controversy surrounding SPACs, AdTech companies seem to line up the hype well with the growth of the advertising industry. Last year, Taboola Inc. began trading with a $ 2.6 million valuation and merged with ION Acquisition Corp 1, a green flag for all industry players to set foot on new ground. Another company that successfully merged with ION Acquisition Corp 1 for $ 1.3 million was Innovid.

In 2021, AdTech investors had more opportunities to park their money for decent returns, from the $ 1 billion AdTheorent bid to the $ 11.1 million ironSource SPAC bid. dollars. In total, the first quarter of 2021 had an investment fund of $ 23.7 million for advertising and marketing companies, where 67% came from mergers and acquisitions.

In contrast to SPAC trends in a wider market, AdTech investors are satisfied with the revenue they receive as stock valuations increase. The reason is quite simple: the programming continues to grow and is offered. According to forecasts made by eMarketer, global spending on digital advertising will reach almost $ 650 million in 2024, making it one of the fastest growing areas of the digital industries.

Unlike other industries, there have been no SPAC-related scandals in AdTech. In fact, IronSource and Taboola had experienced a certain reduction in their valuation, but by the end of December 2021, the former company had fully recovered and the company’s shares were at an all-time high. It remains to be seen whether AdTech will have its own Nikola case. To date, the biggest risks to the reputation and value of shares are those associated with advertising fraud, the activity that must be stopped before any pre-listing due diligence takes place.

Today, SPACs are still the strongest tool for AdTech players to jump into public capital. With digital advertising, connected television, and e-commerce being established as elements of the “new normal” in the midst of the global pandemic, taking this path could be a great option to expand. In early 2022, we should expect to see more companies putting their SPAC plans on the table.

AdTech companies looking for additional funding can find SPAC a welcome ticket to a public offering. It is true that some AdTech giants, including The Trade Desk and PubMatic, have preferred IPOs, negotiating the potential additional cash for their privacy limitations, regulatory obligations, tighter financial controls, and so on. But not everyone is ready to take the difficult path in a fast-paced world, which could still be on the brink of new blockages or significant regulatory changes.

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