SPAC merger: Definition, benefits, case studies

The U.S. capital markets saw 20 new public companies in Q1 2024. Fourteen were traditional IPOs, and six were special purpose acquisition company (SPAC) mergers. The purpose of SPAC mergers is to bypass the traditional IPO process. How are they different from IPOs? Are they better, and how do they work? Keep reading to learn the following:

1. Three stages of the SPAC lifecycle
2. SPAC vs IPO comparison
3. Advantages and disadvantages of SPAC mergers
4. Four recent SPAC mergers (case studies)

What are SPAC mergers, and how do they work?

A SPAC is a dummy company created to raise IPO capital, acquire an existing private company, and make it public.

Special purpose acquisition companies offer a more streamlined way of taking private companies to public markets. Keep reading to learn the process.

The SPAC lifecycle

SPAC lifecycle	Description	Timeline
SPAC formation & IPO phase	A SPAC is formed with a 2% sponsor capital, while 98% is raised through an IPO.	~ 8 weeks
Search for a target company	SPAC identifies the target private company, conducts due diligence, and signs a merger agreement.	~ 20 months
SPAC merger	SPAC mergers with and into the private company. The private company inherits IPO capital and becomes a public company.	~ 3–5 months

SPAC formation & IPO phase

SPACs are usually formed by experienced management teams. Here is the step-by-step process:

1. SPAC formation. The management team (often called a SPAC sponsor) pulls nominal capital (usually $25,000) to initiate the SPAC formation. The blank company gets registered as a corporation for a smooth IPO.
2. Public offering. The company files for an initial public offering. Its IPO prospectus emphasizes the investment strategy in a particular sector or geography.
3. Capital raising. A SPAC raises funds through an IPO. As much as 98% of the capital consists of public equity, which the blank company uses to acquire a private company later. Public investors receive “units” that consist of common stock and fractions of warrants. The warrant fraction is usually 1⁄2 or ⅓. 
4. Establishment of the trust account. The management team puts the IPO capital into an independent trustee. It is separate from the SPAC operational expenses and ensures investor protection. If the SPAC fails to find a private company, the trustee returns capital to public shareholders.

Search for a private target company

SPACs establish merger timelines, most commonly 24 months, while some opt for 18 months. Here is what happens in this intermediate state:

1. Screening and due diligence. The SPAC searches for suitable private companies. Due diligence begins once the acquisition company finds a target company. Investigations are typically less extended than traditional M&A diligence with operating companies.
2. Merger agreement. The two companies negotiate the acquisition price, deal structure, and legal considerations. Afterward, the merger agreement and financial commitments come in.

SPAC merger

The merger phase is the shortest and implies the following activities:

1. Acquisition announcement. The two parties announce the acquisition, and the SPAC files a preliminary proxy statement for further shareholder approval according to the SEC rules. The target company doesn’t require shareholder approval.
2. De-SPAC transaction. SPAC shareholders approve the transaction. The company files the proxy statement and Form 8-K. The entire proxy process takes 3–5 months and is completed with the target company becoming public. The blank check company merges with and into the private target company. Afterward, the target company becomes the surviving entity and transforms into a public company.

How is SPAC different from an IPO? 

A SPAC structure differs from an IPO substantially. Let’s compare the two transactions side by side.

Transaction aspect	SPAC	IPO
Process	A public shell company acquires and merges with and into a private company.	A company lists its shares on stock exchanges.
Capital raising	Public investors buy shares of the shell company. The private company inherits the public shares.	Public investors buy the company stock on stock exchanges.
Complexity for the target	Moderate	High
Approval for the target company	No approval	SEC approval
Timeline for the target company	Five months on average	Around two years

4 advantages of SPAC mergers

SPAC mergers have several advantages over traditional IPOs:

Quick process

A typical SPAC merger is 72% faster than a traditional public offering for a few reasons:

• Straightforward SPAC IPO. A SPAC company doesn’t have commercial operations to review. Therefore, Form S-1 for a SPAC is much simpler than for an operating company.
• Direct negotiations. The target company negotiates merger details directly with the acquiring company, which is faster than several rounds of public company readiness reviews and roadshows.

Predictable funding

SPAC targets benefit from much more favorable initial financial conditions compared to traditional IPOs:

• Financial certainty. The SPAC IPO capital is locked in a trust account and is only released when the acquiring company finds a suitable target. As a result, the target company can rely on predictable finances while entering into the merger agreement.
• Immediate access to capital. The SPAC target will benefit from immediate capital inflow once it goes public. In contrast, the traditional IPO stock may attract retail and institutional investors slower than expected.

Flexible terms

Both SPACs and target companies benefit from flexible acquisition agreements:

• Private negotiations. Deal parties can negotiate pricing terms privately and arrive at mutually beneficial conclusions. In a traditional IPO, however, the target company largely depends on underwriters’ preferences and market conditions.
• Customizable deal structure. Deal parties can customize merger terms to maximize proceeds. For instance, they can conduct reverse triangular mergers to qualify as tax-free reorganization. It’s not an option in a traditional IPO.

Experienced management

SPAC transactions are led by experienced managers, which brings several advantages:

• Considerable growth incentive. SPAC sponsors receive around 20% stake in the IPO capital. It brings enormous returns for a relatively small investment. The sponsors have a clear incentive to maximize returns for the target company.
• Industry knowledge. Target companies benefit from the extensive industry knowledge and management expertise of acquiring companies. That translates into potentially higher post-IPO profits.

3 disadvantages of SPAC mergers

A SPAC merger may not always be a favorable alternative to a traditional IPO. Regulatory scrutiny, investor uncertainty, and bad post-merger performance are frequent issues.

Regulatory scrutiny

SPACs are no longer that easy. New SEC rules require SPACs to disclose more information about projected earnings, sponsors’ compensation, conflict of interest, stock dilution risks, etc. 

The new rules make the regulatory complexity of SPAC mergers comparable to traditional IPOs. They apply to every stage of the SPAC lifecycle.

Investor uncertainty

While SPACs may be beneficial sponsors and target companies, IPO investors and shareholders often hold a different perspective. Investors choose to redeem their shares in 58% of SPAC deals.

Worse yet, over 90% of SPAC investors redeem their shares in ⅓ of the deals. The main reason is that investors can’t analyze investment vehicles before placing funds — SPACs choose targets and make valuations after raising capital. As a result, many investors exit after discovering SPAC targets.

Bad performance

SPAC stock loses an average of 59% of its value post-listing, leaving many IPO investors with tremendous losses. The reasons are many, including limited due diligence, time pressure, incorrect valuation, market volatility, and stock dilution.

The latter is the inherent issue with the SPAC market. Sponsors receive up to 20% ownership in the public company (founder shares), which dilutes the share value for existing shareholders. At the same time, founder shares generate the most profit for SPAC sponsors.

4 recent SPAC merger examples

Let’s take a look at recent SPAC deals:

1. FlyExclusive and EG Acquisition Corp
2. Complete Solaria and Freedom Acquisition Group
3. MoneyLion and Fusion Acquisition Corp
4. SoFi and SCH

FlyExclusive and EG Acquisition Corp.

FlyExclusive is a private jet company with approximately 100 aircraft in operation. The company announced a planned SPAC merger in October 2022 and started trading on the New York Stock Exchange in December 2023.

Parties involved

The proxy statement filed by EG Acquisition Corp. outlined the following parties:SPAC: EG Acquisition Corp., sponsored by EnTrust Global and GMF Capital. Target: LGM Enterprises, LLC, a parent company of FlyExclusive.

Merger details

EG Acquisition Corp. was formed in February 2021 and raised $225 million on May 26, 2021. EG Acquisition Corp. entered into a business combination agreement with FlyExclusive, valued at $600 million at its pre-transaction state.FlyExclusive was expected to generate $310 million in proceeds, including $85 million in convertible notes and $225 million in cash from the SPAC IPO. Also, the sponsors agreed to lock founder shares three years post-merger.

Outcome

FlyExclusive was listed on the New York Stock Exchange under the ticker “FLYX” on December 28, 2023. FlyExclusive reported a net loss of $46.8 million in 2023, while its stock fell from $11.98 to $4.91 on the first trading day. The company stock decreased from $4.91 to $4.12 in the first six months post-listing.

Complete Solaria and Freedom Acquisition Group

Complete Solaria is a solar energy company that produces and services solar panels. Solaria announced a SPAC merger in October 2022, followed by the merger with Complete Solar, a solar panel installation service. 

Parties involved

The Form 8-K filed by Freedom Acquisition Corp. included the following parties:SPAC: Freedom Acquisition I Corp., sponsored by Freedom Acquisition I LLC.Target: Complete Solaria, Inc.

Merger details

Freedom Acquisition Corp. was formed in February 2021 and raised $287.5 million. It acquired Complete Solaria for $888 million on October 3, 2022. The deal was expected to generate $376 million in gross proceeds, including capital from Freedom Corp., PIPE investors, and warrants.

Outcome

Complete Solaria was listed on the Nasdaq exchange under the ticker “CSLR” on July 18, 2023. The company stock plummeted from ~ $11 in July 2023 to $1.37 in June 2024, an 86% YoY decrease. While Complete Solaria’s revenue grew 39% in 2023, its earnings were negative $255.6 million as of March 2024. Still, the company strives to reverse the trend and has cut operating expenses by nearly half.

MoneyLion and Fusion Acquisition Corp

MoneyLion is a profitable mobile banking company with $115 million in net earnings. MoneyLion became a public company in September 2021 and started trading on the New York Stock Exchange under the ticker “ML” the same month.

Parties involved

The business combination agreement outlined the following parties:SPAC: Fusion Acquisition Corp. (Fusion), sponsored by Fusion Sponsor, LLC.Merger Sub: ML Merger Sub Inc., a wholly-owned subsidiary of Fusion Acquisition Corp.Target: MoneyLion Inc.

Merger details

Fusion Acquisition Corp. was formed in August 2021 and raised over $2.3 billion. Fusion acquired MoneyLion for $2.2 billion and raised over $250,000 in PIPE investments. Its merger subsidiary merged with and into MoneyLion, with MoneyLion becoming the subsidiary of Fusion Acquisition Corp. The parties conducted a reverse triangular merger to qualify for the tax-free reorganization under Section 368(a) of the Internal Revenue Code.

Outcome

MoneyLion’s stock price dropped 87% after a year on public markets. However, ML has surged over 670% since April 2023. Also, MoneyLion generated over $400 million in revenue in 2023, a 57% increase YoY.

SoFi and SCH

SoFi is an established online bank and trading platform with $ 615 million in net earnings. SoFi went public in June 2021 after merging with Social Capital Hedosophia Holdings V (SCH).

Parties involved

The merger prospectus outlined the following parties:SPAC: Social Capital Hedosophia Holdings Corp. V (SCH), sponsored by SCH Sponsor V LLC.Merger Sub: Plutus Merger Sub Inc., a wholly-owned subsidiary of SCH.Target: Social Finance, Inc.

Merger details

SCH was formed in January 2021 and raised over $9.5 billion. It entered into an $8.65-billion business combination agreement with SoFi in which its merger subsidiary merged with and into Sofi Finance. SoFi Finance became a wholly-owned subsidiary of SCH. Concurrently, SCH was renamed to SoFi Technologies and began trading under the “SOFI” ticker on the Nasdaq stock exchange in January 2021.

Outcome

SoFi’s stock fell from $25.14 in January 2021 to $4.61 in December 2022. The stock price has been over 40% negative since listing. Still, SoFi Technologies reports $88 million in net income as of 2024, a 37% increase YoY.

Key takeaways

• In a SPAC deal, an experienced team of sponsors forms a blank check company, makes an IPO, finds a promising private company, and transforms it into a public one.
• Quick process, predictable funding, and flexible terms are the main advantages of SPAC mergers for target companies.
• The main disadvantages are increasing regulatory scrutiny, investor uncertainty, and frequent stock crashes post-listing.