SPAC Math No Longer Adds Up

Simplifying a bit, the way a special purpose acquisition company works is that the sponsor of the SPAC raises a pot of money by selling shares to public investors at $10 per share. Say the sponsor offers 20 million shares, so the pot of money has $200 million in it. Then she goes out and looks for a private target company to merge with to take it public. Say she finds a private company that is worth $800 million. (The valuation of a private company will always be uncertain, but let’s assume for now that the valuation of this company is certain, and that it’s $800 million.) If the target company is worth $800 million, and the SPAC is just a pot of money with $200 million in it, then the combined company should be worth $1 billion. So the sponsor and the target company negotiate a merger in which the existing shareholders of the target company get 80% of the shares of the combined company ($800 million worth) and the SPAC shareholders get 20% ($200 million worth). (The merger is sometimes called a “de-SPAC merger.”) The public investors in the SPAC, who put in $10 each, end up with publicly traded shares of the combined company worth $10 each.

If the SPAC sponsor doesn’t find a deal before, typically, the two-year deadline put on the SPAC, she has to give her public shareholders their $200 million back with interest. If she does find a deal, she has to put it to a vote of the public shareholders; they can vote it down if they don’t think it’s a good deal. Even if they vote in favor, they can redeem their stock: Instead of taking new shares in the combined company, the SPAC shareholders can ask for their $10 back (with interest).