SPACs: Post-Merger Survival
City University of Hong Kong (CityUHK) – Department of Economics & Finance
June 25, 2016
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This paper studies how institutional characteristics of Specified Purpose Acquisition Companies (SPACs) are related to their post-merger survival. SPACs are unique financial firms that conduct the IPO with the solely purpose to use the proceeds to acquire another private company. Paper finds that institutional characteristics of SPACs are important in determining post-merger outcomes of new company, specifically when it comes to their suvival/failure. Namely, increases in pre-merger commitment by SPAC stakeholders and initial positive market performance increase post-merger survival likelihood. On the contrary, mergers with higher transaction costs and focused on foreign companies exhibit increased failure likelihood.
SPACs: Post-Merger Survival – Introduction
Going public is one of the most important strategic and financing decision of private companies.While theoretical underpinnings for the motives of the initial public offering (IPO) are well developed, the empirical literature is inconclusive both on the motives to go public and on the further investment decisions of these companies. Fairly unexplored motive to go public is providing financing for future acquisitions. Röell (1996) reports that the access to new finance, together with improved prospects for growth via new acquisitions, is the most important motive for going public. Pagano at al. (1995) finds that new companies use equity capital for financial acquisitions. Fama and French (2004) state that the market for new listed firms is a bellwether for the public equity market, but the frictions can cause some projects to be financed privately. They also argue that IPOs in their sample are more likely to be acquired than are seasoned firms.
Using unique sample of companies conducting an IPO, namely specified purpose acquisition companies (SPACs), with solely purpose to execute an acquisition in the future date within limited time, this paper presents additional evidence on the survival and acquisition frequency of IPOs, and determinants of these choices. Structurally, the merger of original SPAC is a dual event. It is an IPO event for some previously private domestic or foreign company while at the same time it represents an exit for original cash shell, and that is unique characteristics of these companies.
Strictly speaking this paper follows more closely on a string of unit IPO and IPO literature as Schultz (1993), Hensler, Rutherford and Springer (1997), Jain and Kini (1999), Bharba and Pettway (2003), Fama and French (2004), Carpentier and Suret (2011) and Chancharat, Krishnamurti, and Tian (2012) that examine how initial IPO characteristics determine survival of companies post-IPO.
Espenlaub, Khurshed and Mohamed (2012) posit that the length and likelihood of survival have important implications for firm’s stakeholders. In addition, the length of survival can help markets to efficiently price the company and to measure market performance. Finally, regulators can use survival statistics as a benchmark to assess their policies and listing rules. Schultz (1993) reports that after three years, 88.9% of firms that had share IPOs are still around, but only 58.8% unit IPOs. Hensler et al. (1997) find that the survival time for IPOs increases with size, the initial return, IPO activity level in the market, and the percentage of insider ownership. They report failure rate of 55.10% for their sample. Jain and Kini (1999) report that the size of the IPO offering reduces the probability of the firm being acquired relatively to remain listed. They find the evidence that higher quality investment banks acting as underwriters increase likelihood of survival. In overall, 14.25% of the companies in their sample fail, and 17.00% are acquired.
Bharba and Pettway (2003) find that initial prospectus information has higher predictive power to explain future survival/failure of companies than subsequent equity offerings and acquisitions. They report that 16.9% of the firms fail in five year period. Carpentier and Suret (2011) suggest that the size at the IPO and investment bank quality increase probability of survival. Fama and French (2004) report that 26.25% of companies delist and 15.92% of companies merge five years post IPO.
This study extends the literature on post-IPO survival in following ways. First, the paper documents survival rates for unique set of companies organized with solely purpose to acquire another company. Second, paper presents the evidence how institutional characteristics of SPAC determine their post-merged outcomes, specifically when it comes to their failures. Finally, paper contributes to the scant literature on SPACs providing new evidence on their post-merger outcomes and performance.
Modern specified purpose acquisition companies (SPACs) entered the U.S. capital markets in August 2003 when Millstream Acquisition Corporation successfully refurbished an old concept of blank checks and raised approximately $24 million to be used in financing of potential merger with at the time unknown company.1 In finance literature, Jog and Sun (2007) conducted first study and adopted the definition of SPACs by the Security and Exchange Commission (SEC) according to which “a SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.” SPACs are also often structured to avoid being legally subject to the additional requirements prescribed by the SEC to blank check companies. However, SPACs voluntarily incorporate many of regulatory requirements or some derivation of the requirements in order to attract investors.2 Berger (2008) reports that SPACs can provide companies with access to the public markets in ways that traditional IPO cannot. SPACs are better solution than traditional IPO for transactions with complicated circumstances, where companies need immediate rebalancing of capital structure, for companies missing research coverage and companies with the lack of exit opportunities.
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