What is a Special Purpose Acquisition Company?
Also known as a targeted acquisition company, TAC, or SPAC, a special purpose acquisition company that is formed for the express purpose of purchasing another business. Typically, the acquisition is made using funds that are collected from investors and placed into a special interest bearing fund until the purchase is completed and payment is rendered to the previous business owner or owners. This approach normally calls for the investors who form the SPAC to work with an investment bank to structure the fund and provide interested investors with the chance to participate in the project.
In some cases, the special purpose acquisition company forms without really knowing which business will ultimately be purchased. More often, the SPAC comes together as a means of investors determining they want to enter a given market. Funds are raised as the investors look for a business that is already established in that market, and held in a blind trust until the right company is identified and purchased.
For example, a group of investors may form a special purpose acquisition company in order to buy a company that manufactures products using a particular type of artificial sweetener. At the time that the SPAC is formed, they do not know which company they want to purchase, but do see potential for significant returns if they enter the market and make the purchase. Working with an investment banker, the core group of investors function as managers of the new corporate entity, and set about the task of seeking participation by other investors, usually with the promise that they will become shareholders of the acquired company. In the event that a suitable company cannot be purchased, the SPAC returns the funds collected to each of the participants. Should the acquisition take place, all participants stand to benefit from the deal, with the managers who orchestrated the SPAC receiving a portion of the profits, and the investors who contributed to the blind trust receiving shares of stock in the newly acquired company.
There are two schools of thought when it comes to the use of a special purpose acquisition company to purchase an existing business. One opinion holds that this model is simply a way for investment banks and a core group of managers to collect a huge amount of funds and ultimately earn a high rate of return for their efforts, without investing a great deal of their own assets in the venture. Those who see this approach as a legitimate and helpful model point to the fact that acquiring a company through the auspices of a special purpose acquisition company increases public awareness of the products manufactured by the acquired company, and may stimulate demand that was not present before, resulting in increased profits for everyone concerned, including those who invested in the SPAC via the investment bank.
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