To SPAC or Not to SPAC?
By: Yohan Albo & Ezra Kohrman
On March 16, the Israeli digital trading platform eToro Group Ltd. announced it was going public at a valuation of $10.4 billion. There is a special, perhaps in the context of Israel, novel element to the deal. Etoro is not using a traditional IPO; instead it is undergoing a special purpose acquisition orchestrated by a company named FinTech Acquisition Corp V. headquartered in Philadelphia.
To be clear, the deal is not the first of its kind in Israel. Canndoc, Innoviz Technology, Otonomo, Taboola and Payoneer all recently announced deals to go public through the same financial vehicle — known as a SPAC. Its ascension in the last year is hard to ignore. Yet to uncover the full story of the vehicle’s rise, it’s helpful to look back on the long, winding journey it took through Wall Street before landing in Tel Aviv.
A Special Purpose Acquisition Company (SPAC) is a company formed to raise money in an IPO with the intention of using the proceeds to acquire one or more privately held firms. As a type of shell company, a SPAC exists for the express purpose of acquiring other companies to take them public.
A SPAC is often nicknamed a “blank check company”, a reference to the cloud of uncertainty hovering over its early life. The sponsors of a SPAC — the founders responsible for the IPO – are prohibited from unveiling to investors the company they plan to target (that’s if the sponsors know themselves at the time of the IPO).
This process of investing in the dark fundamentally differs from the mechanics of a traditional IPO. Whereas normally IPO funding is inextricably tied to an identifiable product or service, a SPAC has no commercial operations, so investors are instead banking on the reputation and trustworthiness of its sponsors.
During this fundraising stage, sponsors pool together capital and funnel it into an interest-bearing trust account, where it sits until a partner company is found. The group then has about two years to browse the markets and acquire a company. In that period, if no company is found and approved by shareholders, the SPAC is liquidated and investors walk away with their initial investment and interest. On the contrary, if a merger is approved, the target company takes the SPAC’s spot on the stock exchange and can then be publicly traded. The sponsors, in return, hold on to roughly 20% of shares.
On Wall Street, these blank check mergers are proliferating. The value of SPAC deals completed in the U.S. between 2019 and 2020 rose fourfold, outpacing traditional IPOs. Even more impressive, in the first quarter of 2021 alone, the volume of special acquisition deals exceeded that seen in all of 2020, with $166 billion in deals thus far.
Meanwhile, the money entering public markets has increased — a lot. In 2020, for example, investment flowed into public markets so rapidly that, in spite of a worldwide recession, the stock market set multiple record highs. Private companies, seeing the money sloshing around in public exchanges, unsurprisingly want in on the action.
That’s where SPAC’s come in. The vehicle opens the door to the liquidity offered by a booming public market while bypassing many of the limitations of a traditional IPO. A special purpose acquisition, for example, is relatively quick and easy with most of the regulatory procedures taken care of by the sponsors before the merger. Getting publicly-listed through a SPAC can consequently take two to three months, in contrast to a traditional IPO which is more arduous, typically taking at least double the time. That level of immediacy can then foster more calculated market entries, making the vehicle particularly useful now amidst a volatile public market.
In addition to the benefit of added speed, a company can negotiate its fixed valuation before agreeing to merge with a SPAC, translating to greater transparency and reduced risk for the acquired business. What’s more, said company can release forward-looking projections to the market, a practice strictly prohibited under an IPO. That’s advantageous because these projections showcase to investors a potential for growth in the medium and long-term, which is a key selling-point for early-stage companies, especially ones that have yet to break a profit.
It should be noted that despite its virtues, SPACs do have a complicated history. For decades, Wall Street looked down on the vehicle as a dubious backdoor, reserved for companies unable to endure the scrutiny of an IPO. That prevailing dogma fueled a self-fulfilling prophecy, where industry leaders were discouraged from forming SPACs and promising startups were subsequently deterred from merging with them, resulting in a poor track record of deals that then reinvigorated the cycle.
To the surprise of many, the negative feedback loop that once defined SPACs has since been turned inside out. In 2019, a larger than usual group of high-profile investors and industry professionals started underwriting a flurry of SPACs, lending legitimacy to the vehicle and at times, an aura of hype. The shell of shadiness that once enveloped SPACs suddenly started to crack. Furthermore, once these early deals proved fruitful, a broader network of investors and companies caught on, setting off a financial buzz that can now be more aptly described as a financial roar.
Timing was also important. Financial markets in America were flowing with cash as SPACs entered the mainstream. The growth in SPACs could therefore be thought of as both a microcosm and product of broader market trends.
Though regardless of who or what kicked off the SPAC frenzy, it’s clear now that the craze is unlikely to fade any time soon. Quite the opposite, the wave of SPAC mergers seems to be rapidly spreading across borders.
That early Wall Street mania, for example, planted a seed in Israel that is now starting to bloom. In the case of eToro, the 14-year-old company is expected to be listed on Nasdaq by the third quarter of 2021 upon the finalization of its merger. Due to the sheer size of the deal ($10.4 billion), it should help solidify SPAC’s place in the Israeli market.
And while the eToro merger is one among only a few SPAC deals to date involving an Israeli company, it will likely not be the last. After all, Israel has the third most companies listed on the Nasdaq, trailing only the U.S. and China. And given Israel’s asymmetrical startup environment–where there are significantly more bright ideas than capital pools to draw from–the vehicle fits the Tel Aviv mold.
Importantly, SPACs generally perform best in particular industries. The vehicle is well-suited for companies in emerging fields such as artificial intelligence, where moving faster is often synonymous with market power; companies in capital-intensive industries like biotechnology, where large cash infusions are necessary for high returns; and firms in any other high-growth space constrained by capital costs and in need of a fast track to liquidation.
Applying that framework to the “Startup Nation,” it is striking how well SPACs bode with the composition of Israel’s business environment. The vehicle adds a valuable instrument to companies’ toolkit — one that in many cases could pave the fastest, most rewarding path to liquidation.
At DataToCapital, we believe in the transformative power of finding the right investor–or in most cases, investors—for our clients. Yet, we also understand the challenges of early-stage fundraising. The process is complex, timely and competitive. In today’s day and age, connections are everything. That’s why we don’t just help clients develop effective fundraising strategies; we also provide access to an established network of investors, making fundraising simpler and allowing our clients to focus on the work that really matters.
For clients looking toward SPACs as a route to liquidation, we also offer a wealth of expertise in finding the optimal vehicle for our clients, based on the nuances of the company, the market conditions and most of all, the priorities of our clients.
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