Review and Implementation of SPACs in Korea
2010/03/24 9 Comments
Special-purpose acquisition company (hereinafter, “SPAC”) is a kind of investment vehicle for the purpose of pursuing the acquisition of target company. Since SPAC is born to be merged with targeted company, it is also known as a targeted acquisition company (TAC). As a financially healthy shell or blank-check company, SPACs are subject to go public without a specific business operation in order to raises money for acquiring an existing company; which are different from other listed companies who are supposed to have its own business operation in prior to initial public offering (IPO).
Becoming popular in United States and Europe, SPAC was introduced by a boutique investment bank, Early Bird Capital in 1993 to facilitate activity of IPO market. Approximately 13 SPACs went public and successfully completed M&A deal allegedly; however, it had been stagnant since then. Since 2003, SPACs experienced another leap up years. According to stats, approximately 162 SPACs had been listed on stock market with more than $130 million deal size in average.
SPAC consists of three players, sponsor, individual investors, and target company. Sponsor is responsible for founding and operating SPAC. Specifically sponsor group is teamed up with specialists of target industries, M&A specialists, investment fund managers who are in charge of seeking the target company which have a significant growth potential in their business and merge with it. Usually investment bank, mutual fund, venture capital participate in initial sponsor group. Sponsor group is supposed to receive the certain amount of M&A fee in proportion to M&A deal size and additional profit from the deal is plus. Since it is listed on stock market, individual investors are allowed to participate in IPO of SPAC as a shareholder. They are also entitled to receive the certain portion of profit from investment and are free to sell their shares on the market at any time. Target company can be either listed or unlisted company as long as they are in business of potential growth, which sponsor group is seeking.
According to the regulation, at least 90% of fund shall be deposited in escrow account to secure reimbursement of initial public subscription in case those SPACs fail to implement M&A deal. Whether the deal is successful or not, SPACs are destined to dissolve within 3 year period. Once the deal is successful, target company shall replace SPAC and becomes new listed company. Otherwise, SPAC shall be dissolved after the reimbursement.
Based on the study from Korea Exchange (KRX), corresponding to growing popularity of SPAC in U.S. and Europe, the Korean government has adopted SPAC as alternative investment vehicle in order to facilitate capital investment for small-medium companies in need of investment for the business which has a significant growth potential.
As an investment vehicle, SPAC can be compared to other existing method, such as Private Equity Fund (PEF). In terms of foundation scheme, SPAC shall be IPO in the stock market; whereas PEF shall be made by limited partnership. Thus, one is relatively free to trade their shares in the market and the other trades their share in private and exclusive. The following table describes some other differences.
SPAC adopted by Korean government have slightly difference from one in U.S. In terms of sponsorship, Korean implemented tougher measure than U.S. Basically there is no limitation or restriction to become a sponsor in U.S.; however, sponsor shall be the one who has its own equity at least more than KRW 100 billion and management shall be appointed who are currently ranked as an officer in financial sector. Usually share shall be issued as share only. Sponsor is allowed to underwrite share and convertible bond (CB) in Korea, whereas share can be issued by a unit composed of common share and warrant in U.S. Sponsor underwrites its warrant by issuance in private. With respect to M&A structure, only merger can be allowed in Korea; whereas no restriction is imposed in U.S.
As for recent cases of SPACs, Acquicor Technology Inc. and Services Acquisition Corp are considered as notable deals. Acquicor Technology, consists of group of IT and computer technology experts, sought to find the target company in technology, multimedia or networking sectors. Within 3 years, they successfully merged with the target company, Jazz Semiconductor (enterprise value : USD 260 million, initial investment : USD 175 million) Services Acquisition, gathered by finance and retail specialists, pursued to find the target company in business service, healthcare service, and consumer service sectors. They completed M&A with the target company, Jamba Juice in two years (enterprise value : USD 265 million, initial investment : USD 138 million).
Corresponding to implementation of system, Korean financial institution mostly initiated by big securities companies are in process of set up SPACs. According to the recent briefing from financial services commission, seven SPACs got legal entities, and four of them already submitted their applications for public offering and began raising funds. At present, the first SPAC led by Daewoo Securities completed its public offering and listed on KRX. Other SPACs expect to go public respectively.
Despite of the fact that Korea successfully managed to sustain economic growth avoiding the recent massive economic meltdown in worldwide, no one argue that the real economy is in recession indeed. Handful companies checked in turnaround program and massive layoffs are expected. Subsequently, unemployment rate are hiked up. So does inflation. In nature, financial institutions are being skimpy on their loan under the recession. Obviously the companies in need of cash for capital investment will suffer from either discontinuance of loan or insufficiency of loan. Under the circumstances, SPACs will be able to provide sufficient cash to the company in need and contribute to sustainable growth of the company. Furthermore, it will not only facilitate activities of IPO and M&A market, but also become a successful broker of financing between financial investors and target companies. Needless to say, overall economy will be more than welcome to have SPAC.