SPAC stocks - the new hot thing in the market
What is SPAC:
A special purpose acquisition company (SPAC) is an entity that's set up as a company with no existing business purpose of its own. Each SPAC make an acquisition of an existing business which are not publicly traded. It does a merger with such an existing business and from then on, the SPAC takes on the identity of the business that it's acquired and gets traded.
The trend started and caught attention when VectorIQ the SPAC was trading at around $10 until the news broke out on the Nikola merger and was later trading at $34 on the day before it got listed as Nikola. And on Nikola's listing day, it started trading at over $65 and went all the way close to $90. That's a return of 8X within a span for 3-4 months.
- The trading price post merger could be lower
- The deal could be called off despite the companies confirming initially which means investors have to wait more and price will come down.
Warrants is somewhat similar to Call option. In 90% scenarios, holders can redeem warrants to get common shares of the same company after merger by paying extra $11.50. However, as part of merger documents, the SPAC will enlist the condition - e.g. the commons should trade above $18 for a min of 20 days within a 30 day period before warrants can be redeemed. The warrants has a shelf life of 5 years after merger is completed.
During its IPO, the SPAC gets launched as "Units" which will then split into "Commons" and "Warrants". The no. of warrants will be quite less than commons - e.g. The ratio of 1/3 means every 1 Unit has 1 common and 1/3 warrants. Warrants give huge leverage on investments. A typical SPAC with 1/3 warrants will trade around $3 when the commons are at $11-12. And it follows a non-linear path and many will be reluctant to buy warrants at above $50 even if commons trades above $100. When DWAC Spac (Merging with Trump's Social Media) was trading at $150+, the warrants were around $70.
Feel free to contribute to anything related to SPAC in this forum.