Special Purpose Acquisition Companies (SPACs) have emerged as a popular alternative to traditional IPOs, offering private companies a faster and more flexible route to public markets. While the structure may sound complex, the overall process follows a clear sequence—from formation to either a merger or liquidation.
Here’s a step-by-step look at how SPACs work:
1. Formation & IPO
A group of sponsors—usually seasoned investors, executives, or industry experts—form a shell company with no commercial operations. This SPAC goes public through an Initial Public Offering (IPO), raising capital from investors. The IPO typically issues “units,” which include a share of common stock and a warrant. All the funds raised are placed in a trust account for safekeeping until a merger is finalized.
2. Target Search
After the IPO, the SPAC sponsors have a fixed timeframe of 18 to 24 months to identify a suitable private company to acquire. The search usually focuses on industries where the sponsors have expertise, which increases the likelihood of finding a high-potential target.
3. Merger Negotiation
Once a target is identified, the SPAC and the private company negotiate the terms of the deal—covering valuation, equity structure, and post-merger strategy. This stage is crucial, as the terms directly impact both investors and the future of the combined company.
4. Shareholder Vote
The proposed merger must be presented to SPAC shareholders for approval. Investors can either:
* Vote in favour of the deal, or
* Redeem their shares and receive their initial investment back if they do not support the merger.
5. De-SPAC Process
If shareholders approve, the merger goes through. The private company effectively becomes public in a process known as de-SPACing. The new entity often takes the name of the acquired company and begins trading on the stock exchange.
6. Liquidation (If No Target Found)
If the SPAC cannot finalize a deal within the allotted 18–24 months, it must liquidate. In this case, the funds held in trust are returned to investors, minimizing their risk exposure.
✅ Key Takeaway:
The SPAC process offers a streamlined path for private companies to enter public markets, while providing investors with protections like redemption rights. However, the success of the transaction depends heavily on the quality of the target company and the credibility of the sponsors.
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