SPACs Are the Stock Market’s Hottest Trend. Here’s How They Work.
11 min read 
SPACs are the investment of the moment. With interest rates on the floor and investors chasing young companies, this is a dream scenario for SPACs. To know what’s next and how the boom will end, investors need to understand these quirky financial concoctions.
What is a SPAC?
SPAC stands for special-purpose acquisition company, which is Wall Street jargon for a publicly traded company that holds nothing but cash. Also known as blank-check companies, SPACs exist to buy private companies, and effectively take them public while avoiding the pitfalls of a traditional initial public offering.
The hot market has drawn in Wall Street bankers, tech entrepreneurs and celebrities ranging from Serena Williams to former Cosmopolitan editor Joanna Coles. SPACs have taken popular companies like sports-betting firm
DraftKings Inc.
and space-tourism company
public.
The SPAC explosion
Starting last summer, SPACs began surging onto the stock market and the momentum continued into this year. Now, hundreds of SPACs are doing deals or are on the hunt for companies to buy. Technology, electric vehicles and green energy have been especially hot areas.
The Three Stages of SPACs
The boom in SPAC IPOs is now playing out in dealmaking. So far the biggest deal was the acquisition of United Wholesale Mortgage by Gores Holdings IV Inc. There have been about 100 mergers completed since early 2018.
SPAC mergers completed
with IPO proceeds and merger value
Gores Holdings IV
IPO proceeds: $425 million
United Wholesale Mortgage (UWM Holdings)
Additionally, there are more than 100 mergers pending approval, such as Rocket Lab USA’s recently announced $4.1 billion deal to go public through the SPAC Vector Acquisition Corp. Darker shades in the chart indicate periods of heavier deal activity where circles overlap.
SPAC mergers pending approval
Vector Acquisition
IPO proceeds: $320 million
Rocket Lab USA
Deal value: $4.1 billion
There are another roughly 400 SPACs searching for merger targets to take public, including hedge-fund billionaire Bill Ackman’s Pershing Square Tontine Holdings, the largest SPAC ever.
SPACs searching for merger targets
Pershing Square Tontine
IPO proceeds: $4 billion
Note: Darker shades reflect clusters of overlapping circles in periods with greater activity. Chart excludes mergers announced prior to 2018 and a small number since. Deal values exclude debt. Data are as of mid-March.
Sources: Dealogic; SPAC Research
SPAC IPO proceeds and merger value
Note: Darker shades reflect clusters of overlapping circles in periods with greater activity. Chart excludes mergers announced prior to 2018 and a small number since. Deal values exclude debt. Data are as of mid-March.
Sources: Dealogic (mergers, IPOs); SPAC Research (SPACs without merger targets)
The three stages of SPACs
The boom in SPAC IPOs is now playing out in dealmaking. So far the biggest deal was the acquisition of United Wholesale Mortgage by Gores Holdings IV Inc. There have been about 100 mergers completed since early 2018.
Pending mergers
Additionally, there are more than 100 mergers pending approval, such as space-transportation startup Rocket Lab USA’s recently announced $4.1 billion deal to go public through the SPAC Vector Acquisition Corp. Darker shades in the chart indicate periods of heavier deal activity where circles overlap.
Searching for targets
There are another roughly 400 SPACs searching for merger targets to take public, including hedge-fund billionaire Bill Ackman’s Pershing Square Tontine Holdings, the largest SPAC ever.
Bigger IPOs
The amount of money raised in SPAC IPOs has ballooned in the past year.
Growing in number
The daily number of SPAC IPOs has soared, with as many as 15 in a single day, which has happened twice this year.
Search period
Once a SPAC goes public, its search for a merger partner to take its place on an exchange can take more than a year, as it did with Chamath Palihapitiya’s SPAC Social Capital Hedosophia and its merger with Richard Branson’s Virgin Galactic.
Accelerating timelines
In the past year, SPACs are finding merger partners more quickly than before, as was the case with Churchill Capital Corp. IV and its pending merger with electric-vehicle maker Lucid Motors.
SPACs have been around for decades but are taking off now because the biggest players from Wall Street and Silicon Valley are using them to raise money and take companies public. They have raised nearly $95 billion in 2021, soaring past last year’s record total, and account for about 70% of all IPOs this year, according to Dealogic.
How do SPACs work?
A SPAC’s “special purpose” is to use the pile of cash it raises in its initial public offering and other funds it takes in to merge with a private company. The private company then gets the SPAC’s place in the stock market. SPACs typically have two years to complete a deal or they must return money to investors. Lately, many have only needed a few months to announce mergers.
Going public via a SPAC is appealing because it lets private firms talk up their business. It also means their valuation is finalized with a small group of players behind closed doors before a deal is announced. In a traditional IPO, pricing can change until the night before shares start trading.
What attracts investors to a SPAC’s IPO?
…BUT SOME THINGS ARE KNOWN…
In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.
Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.
A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.
Investors have downside
protection until a deal is completed.
How else is a SPAC offering different from a traditional IPO?
IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.
Because there
is no business on
which to base a
valuation, SPAC
offerings typically
are priced at $10
a unit.
Depending on the terms, each unit consists of some number of shares and redeemable warrants. A warrant is a contract that allows the holder to buy additional shares in the future at a given price. A short time after the IPO, the SPAC’s units, shares and warrants begin trading separately.
The SPAC has a predefined time period in which to merge with a target, typically two years.
Proceeds
are used
to merge
with a
private
company…
…or returned
to investors
if the SPAC
doesn’t
execute
a merger.
DEADLINE PASSES WITH NO MERGER
The SPAC can seek to extend the period, which may require shareholder approval. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
Shareholders may have the right to vote on the merger. If approved, they can either retain their shares of the combined company, or redeem them for a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
Once a SPAC announces its target, both parties can make ambitious projections to investors, something that wouldn’t be allowed ahead of a traditional IPO. That can boost the SPAC’s share price before the regulatory documents associated with the merger are publicly released.
SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of their fee until after the SPAC finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.
Combined company
trades under a new ticker
What attracts investors to a SPAC’s IPO?
…BUT SOME THINGS ARE KNOWN…
In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.
Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.
A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.
Investors have downside
protection until a deal is completed.
How else is a SPAC offering different from a traditional IPO?
Because there
is no business on
which to base a
valuation, SPAC
offerings typically
are priced at $10
a unit.
IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.
Depending on the terms, each unit consists of some number of shares and redeemable warrants. A warrant is a contract that allows the holder to buy additional shares in the future at a given price. A short time after the IPO, the SPAC’s units, shares and warrants begin trading separately.
The SPAC has a predefined time period in which to merge with a target, typically two years.
Proceeds
are used
to merge
with a
private
company…
…or returned
to investors
if the SPAC
doesn’t
execute
a merger.
DEADLINE PASSES WITH NO MERGER
Shareholders may have the right to vote on the merger. If approved, they can either retain their shares of the combined company, or redeem them for a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
The SPAC can seek to extend the period, which may require shareholder approval. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
Once a SPAC announces its target, both parties can make ambitious projections to investors, something that wouldn’t be allowed ahead of a traditional IPO. That can boost the SPAC’s share price before the regulatory documents associated with the merger are publicly released.
SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of their fee until after the SPAC finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.
Combined company
trades under a new ticker
What attracts investors to a SPAC’s IPO?
…BUT SOME THINGS ARE KNOWN…
In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.
Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.
A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.
Investors have downside
protection until a deal is completed.
How else is a SPAC offering different from a traditional IPO?
Because there
is no business on
which to base a
valuation, SPAC
offerings typically
are priced at $10
a unit.
IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.
Depending on the terms, each unit consists of some number of shares and redeemable warrants. A warrant is a contract that allows the holder to buy additional shares in the future at a given price. A short time after the IPO, the SPAC’s units, shares and warrants begin trading separately.
The SPAC has a predefined time period in which to merge with a target, typically two years.
Proceeds
are used
to merge
with a
private
company…
…or returned
to investors
if the SPAC
doesn’t
execute
a merger.
DEADLINE PASSES WITH NO MERGER
The SPAC can seek to extend the period, which may require shareholder approval. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
Shareholders may have the right to vote on the merger. If approved, they can either retain their shares of the combined company, or redeem them for a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
Once a SPAC announces its target, both parties can make ambitious projections to investors, something that wouldn’t be allowed ahead of a traditional IPO. That can boost the SPAC’s share price before the regulatory documents associated with the merger are publicly released.
SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of their fee until after the SPAC finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.
Combined company
trades under a new ticker
What attracts investors to a SPAC’s IPO?
A SPAC is a shell company with no operations. At the time of the IPO, its target company hasn’t been determined.
…BUT SOME THINGS ARE KNOWN
In its prospectus, a SPAC may identify a target sector, though it isn’t obligated to stick to it. SPACs are often associated with growth industries, which can be a source of buzz.
Another draw can be the people on a SPAC’s management team, also known as the sponsors. They may have experience in the target industry or a known track record in investing.
Investors have
downside protection
until a deal is completed.
How else is a SPAC offering different from a traditional IPO?
Because there
is no business on
which to base a
valuation, SPAC
offerings typically
are priced at $10
a unit.
IPO proceeds are placed into a trust account as the sponsors begin the search for a private company to merge with.
Proceeds are used to merge with a private company…
…or returned to investors if the SPAC doesn’t do a merger.
MERGER TARGET
IS IDENTIFIED
DEADLINE PASSES
WITH NO MERGER
The SPAC can seek to extend the period. Otherwise, the SPAC is liquidated and shareholders receive a share of the trust account. That typically comes out to $10 per share, plus a little bit of interest.
Shareholders vote
on the merger. If approved, they can either retain their shares, or redeem them for a share of the trust account.
The SPAC and its target can make ambitious projections
to investors, which wouldn’t be
allowed ahead
of a traditional
IPO. That can
boost the SPAC’s
share price before the regulatory documents are publicly released.
SPAC sponsors are typically allowed to buy 20% of the company at a deep discount and SPAC bankers typically defer some of
their fee until
after the SPAC
finds a deal. Those economics help explain why many SPACs are competing to take the same private companies public, boosting valuations.
Combined
company
trades under
a new ticker
In the stock market, the SPAC has three lives. The first comes after the IPO, when the company’s only asset typically is $10 in cash per share. The stock trades around $10, and savvy investors can make money anytime the share price falls too low by getting cash at a discount.
The second occurs after the merger is announced, when the shares often swing based on how investors perceive the deal.
The third happens after the merger is completed, when the shares rise and fall based on the new company’s outlook, just like any other stock. Because the private firm gets the SPAC’s place on a stock exchange, the name of the stock and ticker symbol typically change to reflect the name of the newly public company. For example, DraftKings trades under the ticker DKNG.
Share prices of select SPACs and the companies they took public
Social Capital
Hedosophia
Holdings Corp.
Diamond
Eagle
Acquisition
Kensington
Capital
Acquisition
Social Capital
Hedosophia
Holdings
Corp. III
Share prices of select SPACs and the companies they took public
Social Capital
Hedosophia
Holdings Corp.
Diamond
Eagle
Acquisition
Kensington
Capital
Acquisition
Social Capital
Hedosophia
Holdings
Corp. III
Share prices of select SPACs and the companies they took public
Social Capital
Hedosophia
Holdings Corp.
Diamond
Eagle
Acquisition
Kensington
Capital
Acquisition
Social Capital
Hedosophia
Holdings
Corp. III
Share prices of select SPACs and the companies they took public
Social Capital
Hedosophia
Holdings Corp.
Diamond
Eagle
Acquisition
Social Capital
Hedosophia
Holdings
Corp. III
Kensington Capital
Acquisition
Write to Peter Santilli at peter.santilli@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com
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