SPACs vs IPOs: what are the differences?
Each company looking to go public can choose how to list on the stock market –two of the ways to do this is via special purpose acquisition companies (SPACs) and initial public offerings (IPOs). Learn more about SPACs and IPOs.
What’s the difference between a SPAC and an IPO?
SPACs and IPOs are different in several ways. While the traditional way of going public is through an IPO, it typically takes time. Parts of the process, such as financial audits and regulatory filings, can be lengthy.
This is one of the reasons some companies have turned to SPACs for their listings. Others include avoiding uncertainty in listing value, having the legwork already taken care of, and the availability of knowledgeable initial sponsors.
Despite the differences between SPACs and IPOs, there’s a common goal – to ensure that the company is listed on a stock exchange so that its shares are available to be traded publicly. This may be in an effort to raise capital to fund expansion, pay debts, attract and retain talent, or monetise assets. A company may also want to list on a stock exchange to improve its public profile.
Here’s are the main differences between SPACs and IPOs:
What are SPACs?
SPACs, or special purpose acquisition companies, are shell companies formed for the purpose of raising capital to merge with a private company that’s looking to go public. Once a SPAC sponsor has found a company for the business merger, and raises enough capital, it can acquire the target company. By merging with the SPAC, the private company becomes publicly listed.
The number of companies that take the SPAC route is on the rise, along with its popularity among those that’re looking to float. As of December 2021, a total of 606 SPAC mergers have taken place, raising over $161.5 billion in the process, up from the 2020 total of around $83.4 billion.1
What are IPOs?
IPO stands for initial public offering, the traditional process by which private companies become publicly traded.
The private company hires investment bankers to perform the role of underwriting. The underwriter assists the company with filing its documents and awaits approval and terms of the deal.
Depending on the company’s profile, the process of marketing and drumming up investor support can take a long time in comparison to SPACs. Once the investors are interested in the IPO, the underwriter will allocate the shares available for sale.
In 2021, there were 2388 IPOs globally, up 64% year-on-year to record more than $453 billion in proceeds. Of the total number, the highest number of IPOs (593) were registered in China.2
Why do companies choose to go public with SPACs over traditional IPOs?
The decision to opt for a SPAC instead of the traditional IPO is not one taken lightly. Some of the factors that influence whether companies to choose SPACs over traditional IPOs include:
- The cost of going public via a traditional IPO is typically significantly higher compared to SPAC merger
- The time it takes for a SPAC merger to happen is often much shorter than the traditional IPO
- The private company often benefits from the insights of SPAC sponsors, who are usually financial investors and private equity or hedge fund industry professionals
- The valuation of a company will be based on its potential after the merger and it’ll not be subjected to the financial audit linked to a traditional IPO
Examples of companies that went public via SPAC
DraftKings
One of the most prominent SPAC mergers that happened recently was the DraftKings and Diamond Eagle Acquisition business combination in 2020. The SPAC raised $350 million before the acquisition. The resulting merger valued the company at $3.3 billion in the US.
Virgin Galactic
Virgin Galactic went public via a SPAC merger in 2019, with Richard Branson famously quoted as being ‘too impatient’ to wait for a traditional IPO. His space exploration efforts with SpaceShipTwo had already exhausted over $1 billion. Thus, he needed funding. The company went public valued at $1.4 billion.
Nikola Motor
Electric vehicle startup Nikola merged with VectoIQ acquisitions. The SPAC raised $200 million in May 2018 and by March 2020, the deal with Nikola Corp was finalised. The company was valued at more than $3.3 billion after the merger.
WeWork
WeWork is a flexible space provider that became publicly listed in 2021 thanks to the BowX Acquisition Corp merger. The blank check company raised $9 billion to get the deal over the line. In 2019, WeWork was slated to go public at an estimated valuation of $47 billion. However, investors backed out of the deal following concerns over the management style and business model.
Cazoo
The British used car company Cazoo merged with US SPAC firm AJAX in 2021. The sponsor raised around $1.6 billion, valuing the online car dealer at $7 billion. Cazoo says this valuation is justified given their latest forecast for revenue-growth rates and improving operating margins. Sales are expected to soar with an expansion plan earmarked for regions such as France and Germany in the future.
Advantages and disadvantages of listing with a SPAC vs an IPO
Pros and cons of listing via SPAC
| Advantages of a SPAC | Disadvantages of a SPAC |
|---|---|
| Access to knowledge and expertise of the initial sponsors | Company sponsors (experts) might not stay on-board long after the merger |
| Target company value is certain before the listing | A certain loss of independence for the target company |
| Time to listing is shorter as the shell company already had its IPO | SPACS don’t require the same level of due diligence as the traditional IPO |
| Could present opportunities for investors to access ‘unicorn’ companies | Sponsors could receive stocks and sell them shortly after the listing, which could affect the share price |
Pros and cons of listing via IPO
| Advantages of an IPO | Disadvantages of an IPO |
|---|---|
| Could raise a lot of capital before the listing More costly and time-consuming to list | More costly and time-consuming to list |
| Opportunity for investors to get in on the stock during early stages | The market tends to be volatile when stocks list initially |
| Regulations provide a lot of oversight of the listing process | Can be quite a stringent process |
| Positive news coverage can drive the possible valuation up before the listing | Uncertainty about valuation until listing day |
How can you trade or invest in a SPAC or IPO?
You can trade and invest in a SPAC or IPO with us. You can speculate on IPO and SPAC companies’ share prices via a spread betting or CFD trading account. Or, you can own shares in a company once it has listed by opening a share dealing account. Follow these steps to trade or invest in SPACs and IPOs:
- Decide whether you want to trade or invest
- Create a spread betting, CFD trading or share dealing account, or open your existing account
- Look for the stocks you want to trade on our platform
- Choose your position size and take steps to manage your risk
- Place and monitor your trade
We track upcoming IPOs to help you spot the next global trend and promising companies.
It’s important to note that trading via spread bets and CFDs carries high risk due to leverage. Your exposure is much larger than your deposit (margin), and losses can easily outweigh your initial outlay. Take steps to manage this risk by using some of our tools.
Find out more about the difference between trading and investing
SPAC vs IPO summed up
- SPACs and IPOs are two different ways that companies can use to go public, each process with its own advantages and drawbacks
- SPACs have grown in popularity with more companies opting for lower cost of going public
- IPO is a traditional way of listing on a stock exchange, typically takes a while longer in comparison
- Trade IPOs and speculate on the company’s market cap on its first day, become an investor and sell shares once the company is publicly traded
- With us, you can get exposure to IPOs or SPACs by trading or investing in company shares
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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