Special purpose acquisition companies, or SPACs have loitered the Earth since the 1990s. When David Nussbaum and Steven Levin of investment bank GKN securities dreamt up the scheme in New York their rising success was cut short by regulatory trouble that cost them 2 million dollars in fines. SPACs have resurfaced throughout the years met with cynics and crusaders alike, however they’ve seen exponential growth since 2016, crafting out their living more recently through the likes of Burger King and Virgin Galactic. As US based investors have hunkered down and poured their funds down the throats of middlemen only too eager to broker deals with hefty potential profitability, nearly 83 billion have been invested in SPACs in 2020 itself.
The key feature of these ‘blank checks’ is the expedited timeline, thus after the initial IPO of the SPAC, brokers only have up to 24 months to finalise an acquisition target. If they don’t shoot their shot, the SPAC would dissolve and investors have their money returned. Naturally there is great performance pressure on the ivory tower sponsors, 300 firms are looking to merge with or acquire targets this year or face dissolution, according to Morrison and Foerster, a law firm. Calling on Marshall’s theory, whereas demand for stellar merger partners is high, the supply of suitable unlisted firms doesn’t come close. Feeling the heat of their deadlines, management teams consider heading towards Asia in search of fresh meat.
SPACs are notorious for their vague criteria of investment, chief amongst which is the field of ‘technology’, box shattering, eye opening inventions that leave a blaze in their paths. A field in which innovation always trumps profits, something that may fly for wall street but falls flat in front of many conventional Indian investors. Frequenters of the Bombay Stock Exchange, or BSE, often price regular dividends and reliable profits over charismatic leaders and cutting-edge developments. While it’s true that Indian tech start-ups have made considerable progress in funding their operations, raising a record breaking 14.5 billion in 2019, it’s important to note the thorns in their sides.
Much of the capital raised by top Indian tech companies come through foreign direct investments, Ola, Zomato and Paytm amongst many others having considerable foreign stake, leading investors to believe that foreign outreach is imperative in their success. This is further affirmed with Indian unicorns like Flipkart and OYO looking to go public overseas in order to tap plush markets. Additionally, an open letter sent out from key investors left many Indian tech start-ups out to dry, warning of tough times ahead with a lost funding appetite due to an uncertain “macro environment,” and serving as a sobering moment. Thus, many Indian firms are registering themselves internationally but operating in India, sounding alarms in the Indian government which has proposed policies in a bid to keep its best start ups at home. However, until these come to fruition the Indian start up market seek foreign listings.
Sea Group’s listing on the New York Stock exchange served as a beacon of hope for Asian firms, particularly those in the east, looking to go public abroad. However, the allure of the IPO has been diminishing significantly. Direct IPOs come with great benefits however are held back by their lengthy timeline, ranging from 12-24 months while the SPAC process only spans 5-6 months after a company is identified. While many may see this as a downside, with management teams having to make changes at an astronomical pace, many others appreciate the haste. Opting for the SPAC route also ensures that firms don’t have to angle for the perfect time to debut, something that proves to be a blessing with a volatile stock market. The latter is particularly soul saving when the pandemic is taken into consideration.
Looking east gives a more seasoned view, with ‘SPAC’ being whispered down every corporate corridor, with unicorns like Grab in Singapore and Indonesian e-commerce company, Tokopedia. Bridgetown Holdings, a SPAC backed by billionaires Peter Thiel and Richard Li, showed interest in the latter Indonesian unicorn. While expedited talks of Tokopedia’s merger with another Indonesian unicorn, ride hailing firm Gojek, have put things on hold, the combined giant will be looking to list both in Indonesia and in the US. Sources report that various blank check companies have approached both companies for offers to take them public in the US, a deal that could prove to be trend setting for all in Asia, including Indian tech start-ups.
2021 may as well prove to be the year of De-SPACING, as the process of merging with a start-up is called, yet there are many hurdles that may put a stop to the party. The Tokopedia-Gojek behemoth may as well chose to pursue a traditional IPO, Indian start-ups may be swept away by their government in shining armour, yet American blank checks need to be filled and there are likely to be more Asian names on the dotted lines.
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