Q&A - SPACs In Singapore
SPAC vs IPO. What are the main differences and how to decide which is best for an asset company?
An initial public offering (IPO) involves a firm that has a history of operations, as well as a business and assets that generate income. An IPO also entails a long book-building and underwriting procedure by investment banks and other intermediaries, which can take anywhere from 9 to 12 months or longer to complete.
A SPAC eliminates the preceding prerequisites and may be completed in 3 to 6 months (this
timeframe related to the time it takes for the SPAC to be listed and does not cover the
acquisition of a business for the purposes of a business combination).
Therefore, a SPAC allows the SPAC listee:
(i) To circumvent IPO requirements such as the need for financial and operating track records.
(ii) To avoid the uncertainty of the price discovery process that accompanies the book building and underwriting process of an IPO. The price discovery in an IPO depends on market conditions as well. With respect to SPACs, the issue price can be pre-negotiated before the listing.
(iii) To incur less expenditure (since there are no underwriting fees) and to spend less time than a traditional IPO.
(iv) To leverage the expertise of an experienced sponsor to assist and guide the target company that will be acquired to grow its business. SPAC sponsors often are experienced financial and industrial professionals. They can tap into their network of contacts to offer management expertise or take on a role themselves on the board.
(v) If the target company is a startup, SPACs allow the target company to negotiate favourable transaction conditions with the SPAC sponsor, such as valuation and investment flow (currently not available for the traditional IPO route).
Perhaps more crucially, a SPAC’s deal price occurs early in the process, at the moment the business combination agreement is signed, as opposed to an IPO, which occurs at the conclusion of the transaction. Locking in pricing earlier in the process has been especially attractive amidst markets roiled with uncertainty due to COVID-19.