The struggling initial public offering (IPO) market and the credit crunch have limited the exit strategies for portfolio companies. In this environment, a relatively new entrant has emerged — the special purpose acquisition company (SPAC) — an entity whose assets consist entirely of cash and cash equivalents. A SPAC is a publicly traded “blank check” company, formed for the purpose of effecting a business combination with an unidentified operating business. The merger of a private operating company with a SPAC is a method for the private company to go public. Recent high-profile offerings, including Nelson Pelz’s Trian Acquisition Corp., which raised $920 million, and offerings underwritten by top-tier investment banks, including Citigroup Inc., UBS A.G. and Deutsche Bank A.G., have brought legitimacy to and focus on the SPAC market.
As an exit strategy, SPACs offer advantages over private equity funds and strategic buyers. For example, SPACs have substantial cash as well as publicly traded stock to finance an acquisition. While the owners of a target company typically must accept a portion of their consideration in capital stock, the SPAC’s cash position enables these sellers to partially cash out while also increasing the value of their retained interest in the company post-combination. In addition, because of its strong cash position, a SPAC does not need to take on as much debt as that typically taken on by private equity firms to complete an acquisition.
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