Finance professor examines major data set to determine the pros and cons of a public/private merger

Finance professor Donghang “DH” Zhang recently published research surrounding special-purpose acquisition companies (SPACs)  and their consequent mergers with private operating companies. The paper sheds light on the advantages and disadvantages for a private company to go public via merging with a SPAC.

Published research: “SPACs” — Social Science Research Network, July 2021

Why it matters:

• SPACs, which are blank-check companies, provide private companies an alternative way of raising capital and going public. For private companies going public via merging with a SPAC, it can be completed more quickly and with less uncertainty because the SPAC has raised the capital through the SPAC initial public offering (IPO) process.
• A traditional IPO does not allow the issuing company to provide forecasted numbers to investors. For a company going public via a SPAC merger, it is no longer viewed as an IPO from the regulator's perspective, the company is allowed to use forecasted numbers to justify its valuations and to attract potential investors.

Research design:

• Zhang and his colleagues scrutinized 151 SPAC IPOs from January 2010 to December 2018 and documented the economic outcomes for the three major players with a SPAC and its consequent merger with an private operating company (the de-SPAC transaction):
  • Investors who buy the units from the SPAC IPO: These investors have earned on average an annualized return of 12 percent, an attractive average return. Even the worst-performing SPAC provided a positive return of 0.51 percent per year.
  • Sponsor(s) of the SPAC: Their more or less free-founder shares can be worth millions or tens of millions of dollars.
  • The operating company that merges with the SPAC: Merging with a SPAC is usually a more expensive way of going public than a traditional IPO, but having raised capital in an IPO, a SPAC can negotiate a merger with a private operating company in a timely manner.
• One example Zhang and his colleagues saw in their research: Starting in mid-2020, a series of companies in the electric and autonomous vehicle industries went public by merging with SPACs. The conjecture is that these companies chose SPACs over traditional IPOs to swiftly take advantage of the public equity market's favorable sentiment, evidenced by the 743 percent increase in the stock price of Tesla in 2020.

Learn more about their research.

“A SPAC, also known as a blank-check company, is a corporation listed on the public stock exchange that a non-listed or private company can merge with, in the process taking the merged company public. The SPAC merger allows the private company to go public by merging with the blank-check company instead of following the traditional initial public offering (IPO) process,” Zhang said.

About Donghang “DH” Zhang:

• Zhang joined the Moore School’s finance department in August 2002 as an assistant professor.
• His research focuses on securities issuance, financial institutions and corporate finance.
• Zhang teaches investments and corporate finance at the undergraduate and master’s levels and an introduction to financial theory Ph.D. course.
• Zhang earned his bachelor’s degree and a master’s in economic geography from Peking University in China and a doctorate in finance from University of Florida.

Zhang’s co-authors include Minmo Gahng, finance Ph.D. student at the University of Florida, and Jay R. Ritter, Cordell Professor of Finance at the University of Florida.