Once associated with fraud, ‘SPAC’ deals now are rehabbed and swapped for failed IPOs

Richard Branson's Virgin Galactic space company went public after merging with a Silicon Valley-based special purpose acquisition company.
(Reed Saxon / Associated Press)

Move over, IPOs.

Special-purpose acquisition companies, once a last resort for owners looking to exit an investment, have become a popular choice for private companies spooked by the swings in the regular IPO market. The volume of SPAC deals hit an all-time high in 2019.

Instead of a regular initial public offering that would raise funds through a share sale, a small but growing number of IPO candidates are choosing to sell themselves to SPACs instead.

DraftKings Inc. is the latest example. The sportsbook operator agreed to sell to Diamond Eagle Acquisition Corp., along with gaming technology firm SBTech, in $3.3-billion deal on Monday. By merging with a SPAC, DraftKings still goes public, but it’s through a reverse merger, or a so-called backdoor listing.


Having well-known backers such as blue-chip private equity firms and former public company CEOs involved also has rehabbed the image of SPACs, or blank-check companies that raise money for acquisitions.

It didn’t hurt that billionaire Richard Branson did a SPAC deal too. Still, Branson’s space company, Virgin Galactic Holdings Inc., which went public after merging with a Silicon Valley-based SPAC, is trading lower than where its shares debuted in October.

One of the largest companies to do a SPAC deal after exploring an IPO is Blackstone-owned Vivint. Blackstone had explored an IPO or sale of the technology company and ended up merging it with a SPAC raised by SoftBank’s Fortress Investment Group, in a deal valued at $5.6 billion including debt.

Merging with a SPAC can save a listing candidate months or even a year compared with a regular IPO, said Ryan Maierson, partner at law firm Latham & Watkins.

The lackluster showings of ride-hailing companies Uber Technologies Inc. and Lyft Inc. that hurt the IPO market in 2019 have played a big role in the resurrection of SPACs.

“We have a downdraft in IPO activity recently, and SPACs that are looking for a target would be a good fit for companies looking to go public that aren’t finding investors in the IPO market,” Maierson said.


Blank-check companies were created in the 1980s and were associated with fraudulent activity and penny stocks, which gave them a bad reputation. They now have stricter rules.

SPACs have raised $13.5 billion in the U.S. this year so far, the most on record and surpassing 2007’s $11.7-billion total, according to data compiled by Bloomberg. These firms announced $24.6 billion of acquisitions this year, another record.

A news manager works on his laptop at the Boston office of daily fantasy sports company DraftKings. Last week, the company went public in a $3.3-billion reverse merger with a SPAC.
A news manager works on his laptop at the Boston office of daily fantasy sports company DraftKings. Last week, the company went public in a $3.3-billion reverse merger with a SPAC.
(Stephan Savoia / Associated Press)

Goksu Yolac, JP Morgan’s head of SPACs, estimates there is nearly $19 billion of capital raised via SPACs “that is waiting to be deployed via M&A.”

Private equity firms also like buying companies through SPACs to pay down the target’s debt quicker, said Thomas H. Lee Partners co-President Scott Sperling. The firm bought a healthcare technology company called Universal Hospital Services Inc. in January and renamed it Agiliti.

“It makes for a less risky transaction by de-levering with the SPAC capital,” Sperling said.


The average size of a SPAC raised this year is more than $230 million, compared with about $180 million in 2016, the data showed.

To be sure, SPAC listings come with risks. Target companies often give up more control and economics when they sell to a SPAC, which has its own operating team in place. They’re also subject to a vote by the SPAC shareholders. Sometimes this can lead to deals being scrapped before they can close.

The parent company of CEC Entertainment Inc., which runs Chuck E. Cheese and Peter Piper Pizza, canceled a $1.4-billion merger with a Lion Capital-backed SPAC in July, three months after it was announced.

Still, SPACs continue to attract high-profile dealmakers. Michael Klein, a veteran banker who founded boutique investment bank M. Klein and Co., raised $690 million via Churchill Capital Corp II, the biggest deal of its type this year. Churchill has held talks to buy Spanish-language broadcaster Univision Communications, people familiar with the matter have said.

Big names such as TPG Capital, Apollo Global Management and the investment bank Centerview all have SPACs now.

“You have very high-profile SPAC issuers in the current times versus pre-crisis when it was lesser known sponsors for the most part,” said Paul Abrahimzadeh, co-head of equity capital markets for North America at Citigroup Inc, the fourth-largest SPAC arranger this year. “They’ve become more mainstream.”