SPAC PIPEs Sometimes Leak
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A special purpose acquisition company is a publicly traded shell company that raises a pot of money to go out and find a private company, merge with it, and take it public. When the SPAC goes public, it sells shares for $10 each and puts the money in the pot; then the shares trade on the stock exchange while it looks for a target. Initially, they should trade at roughly $10, since they represent a claim on $10 in the pot of cash. But then the SPAC finds a deal, negotiates it, signs it, and announces it to the market, and then the shares of the SPAC will trade to reflect the market’s view of the deal. If the deal is good, the SPAC shares will trade up, to $12 or $15 or $35 or whatever. If the deal is bad, the SPAC shares will probably trade at about $10, since SPAC investors who don’t like the deal can get their money back instead of rolling their shares into the new company.
That feature of SPACs — that investors who don’t like the deal can get their money back — is a little annoying for the target company. If you are a private company and you sign a deal with a $200 million SPAC to go public, you are hoping to get the SPAC’s $200 million: Like an initial public offering, a SPAC merger is not just a way to get a stock-exchange listing but also a way to raise money. But the SPAC’s shareholders can take their money back, so you don’t actually know, when you sign the deal, how much money you will get. Could be $200 million, could be $10 million, could be zero.