What Are Special Purpose Acquisition Companies?

What Are Special Purpose Acquisition Companies?

Special Purpose Acquisition Companies (SPAC) an alternative to traditional IPO have been quite popular among investors during the pandemic. Let us understand in brief on how they operate.

Crux of the Matter

What Are SPACs?
Special Purpose Acquisition Company (or SPAC) is created solely for raising capital via an IPO for purchasing another company. Typically, it is established by investors who are experts in a particular industry domain.

What Is So Peculiar?
The founders usually have one target acquisition – which is not disclosed to avoid lengthy disclosures. Thus, SPACs are also known as Blank Cheque Companies since the investors have no clue where the money will be invested.

How Does It Work?
A SPAC raises money through IPO by selling shares (typically at $10 each). Along with it, a warrant is sold that gives investors preference to buy more stock at a fixed rate in future. The money raised via IPO is kept in an interest bearing trust until one of the two things happen:

  • The sponsors identify the target and acquire it or buy a stake in it using the funds raised. If the target is an unlisted firm, it becomes public via SPAC’s acquisition.
  • The SPAC is unable to find a company to merge/acquire in a time span of 2 years (subject to change) – resulting in its liquidation.

SPAC v/s IPO
Traditional IPOs are subject to:

  • Heavy regulations
  • Investor scrutiny
  • Take 4 -6 months to complete
  • Need to hire underwriters, do roadshows, pitch meetings, etc.

SPACS:

  • Quick listing possible due to no scrutiny
  • More like shell companies
  • Rely on the reputation of sponsors
  • Sponsors usually receive 20% of the target’s shares at a heavily discounted price .

Significant SPACs

  • Bill Ackman raised $4 billion through its SPAC Pershing Square Tontine Holdings Ltd.
  • Chamath Palihapitiya’s (former Facebook executive) Social Capital Hedosophia Holdings acquired a 49% stake in Virgin Galactic in 2019.

Curious to know how IPOs work? Read here

Curiopedia
  • A reverse merger or reverse IPO is the acquisition of a public company by a private company so that the latter can bypass the lengthy and complex process of going public. An IPO through a SPAC is similar to a standard reverse merger. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies going public in standard reverse mergers.
  • According to an industry study published in January 2019, from 2004 through 2018, approximately $49.14 billion was raised across 332 SPAC IPOs in the United States. NASDAQ was the most common listing exchange for SPACs in 2018, with 34 SPACs raising $6.4bn. 
  • SPACs compete directly with the private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these three groups could result in a bid for the best company and possibly increase valuations.

Most Awaited IPOs Of 2021

Most Awaited IPOs Of 2021

Since the beginning of 2021, there is a lot of interest in upcoming IPOs (Initial Public Offerings) among investors. With the government’s disinvestment goal acting as a perfect catalyst, let us look at some of the popular IPOs expected to be floated in 2021.

Crux of the Matter

Understanding Market Parlance
Fresh Issue
Issuing new equity shares of the company and selling them to investors in an open market.

Offer For Sale
Selling of shares by an existing promoter. A mechanism that allows the promoters of the company to reduce its holdings.

Life Insurance Corporation

  • LIC IPO is being touted as India’s biggest ever
  • The insurer controls 72% of the market and enjoys a 66% share in total first-year premium collection
  • Expected to contribute  a huge chunk to GOI’s goal of ₹2.1 trillion of disinvestment in FY21

Zomato
After raising $600 million from Tiger Global and others in a pre-IPO round, Zomato is expected to file for an IPO this year. This could be the first of the new-age Indian startups to go public.

Nykaa
The very first by an online cosmetic market, Nykaa plans to launch an IPO at the valuation of $3 billion mostly in the second half of 2021. 

Bajaj Energy

  • One of the largest thermal energy generators, BE’s issue size is expected to be ~₹5,450 crores.
  • It is also looking to acquire Lalitpur Power’s 1980 MW power plant from the proceeds of the IPO.

Kalyan Jewellers

  • One of the leading jewellery brands in India, the company is planning to raise ₹1,750 crores.
  • The IPO may consist of a fresh issue of ₹1,000 crores with the rest being Offer for Sale

RailTel Ltd.
From the department of Railways, this ICT infrastructure provider’s tentative issue size is ₹700 crores.

Read in detail about how do IPO’s work here

Curiopedia
  • Yogakshemam Vahamyaham“, the slogan of LIC is derived from Bhagavad Gita, which means “Your welfare is our responsibility“.
  • Nykaa was founded in 2012 by Falguni Nayar. The Nykaa brand name is derived from the Sanskrit word ‘Nayaka’ which means ‘one in the Spotlight.’
  • As of 2015, Indian Railways was India’s largest employer with ~1.4 million employees. It was also the world 8th largest employer.

Nazara Technologies: India’s First Gaming Company To File For An IPO

Nazara Technologies: India’s First Gaming Company To File For An IPO

Founded by Nitish Mittersain in 1999, Nazara Technologies is all set to file one of the initial tech IPO’s of 2021. The story aims at understanding the firm’s background with brief coverage of India’s gaming market.

Crux of the Matter

Background

  • Mumbai-headquartered Nazara Technologies has filed for an IPO, the second time after a failed attempt in 2018.
  • Backed by the Big Bull of Dalal Street, Rakesh Jhunjhunwala, Nazara would be completing the public issue by the sale of 49,65,476 equity shares.
  • Nazara is eyeing revenue of ₹470 crores in FY21, which is ~2 times the revenue of 2020.

Promoters & Investors

  • Promoters: Vikash Mittersain, Nitish Mittersain, and Mitter Infotech LL.
  • Investors: Rakesh Jhunjhunwala, Arpit Khandelwal, IIFL Asset Management, Seedfund2 International, and Plutus Wealth Management.
  • The previous investor, Westbridge Capital exited Nazara by selling shares worth ₹500 crores to Plutus Wealth and is believed to have got 40x returns.

Indian Gaming Industry

  • India holds the fifth position in the mobile gaming industry globally in terms of number of users.
  • The first four spots belong to US, China, Brazil, and Russia respectively.
  • The projected user base in India in 2021 is 628 million gamers.
  • There are 275 game development companies in India in 2019. The same stood at mere 25 in 2010.
  • Growth catalysts in online gaming: Increased penetration of smartphones coupled with the availability of high-speed, and affordable internet.

A Look At India’s Gaming Sector In Figures

Read in detail about how IPO’s work: How Do IPOs Work?

Curiopedia
  • Raji: An Ancient Epic is an Indian action-adventure video game developed by Nodding Heads Games based in Pune, India. It was released on 18 August 2020 on Nintendo Switch. It was nominated for best debut game at The Game Awards 2020 but lost to Phasmophobia. This was the first time that an Indian game had been nominated for an award at the show.
  • 8bit is an Indian Esports Organization founded by Lokesh Jain and Animesh Agarwal in 2017. The organization came to prominence after the rise in fame of PUBG Mobile in India and 8-Bit’s content creators on youtube.
  • The Olympic Games are also seen as a potential method to legitimize esports. A summit held by the International Olympic Committee (IOC) in October 2017 acknowledged the growing popularity of esports, concluding that “Competitive ‘esports’ could be considered as a sporting activity, and the players involved prepare and train with an intensity which may be comparable to athletes in traditional sports” but would require any games used for the Olympics fitting “with the rules and regulations of the Olympic movement“.

How Do IPOs Work?

How Do IPOs Work?

The December IPO season has already started with the Burger King IPO being a blockbuster with 157x subscription. Retail investors have been pumping in money in almost every IPO since July. So far there have been 3 IPOs this year with subscription of over 150 times, Burger King, Mazagon Dock Shipbuilders, and Happiest Minds. So, what is the procedure followed by these companies? How do they get listed? Let’s get clear with the basics.

Crux of the Matter

What Is IPO?
An IPO is the selling of securities to the public in the primary market. Book Building is the most common process followed – it aides in price and demand discovery. In this mechanism, when the book is open, bids are collected from investors at various prices within a price band. The issue price is determined based on the demand generated in the process.

Process Of IPO
1. Merchant Bankers with regional and national reach are hired. Among them, one is chosen as the Book Running Lead Manager (BRLM).

2. Red Herring Prospectus is submitted to the exchanges, SEBI & ROC. It contains information on the company’s past performance, future plans, etc.

3. Company (issuer) specifies the number of securities to be issued and the fixed-price or price band. The price band must have a maximum spread of 20%. For instance, if the floor price (lower limit) is ₹10, then the ceiling price (upper limit) of the price band must not be more than ₹12.

4. Syndicate members with whom orders are to be placed are appointed. The syndicate members input the orders into an ‘electronic book’. This process is called ‘bidding’ and is like an open auction. The bidding window normally remains open for 3 days. Bids must be entered within the specified price band.

5. Different categories as defined by SEBI: Retail Investors, Non-Institutional Investors, & QIB have their own Quotas.

6. At the close of the book-building period, the book runners evaluate the bids based on the demand at various price levels.

7. The final price is decided by the issuer post the closing of the bid. Allocation of securities is made to the successful bidders, the rest get refund orders by the Registrar & Transfer Agents.

Payment Method
The payment method is ASBA, i.e., Application Supported by Blocked Amount. It simply means that an applicant authorizes its bank to block the required funds in her savings or current account.

Example
If one fills the Burger King IPO at a price of ₹60 and a fixed lot of 250 shares, the total blocked amount in your bank account is ₹15000. If one is allotted the shares, the money will be deducted from the bank account, whereas it will be unfreezed if the investor does not receive the allotment.

Face Value Of Equity Share
Subject to provisions of Companies Act/ SEBI Act/ regulations, an issuer (other than a government company/ statutory authority/ corporation/ any SPV set by them engaged infrastructure sector) making an IPO may determine the face value of shares in this manner:

1) Face Value ≥ ₹ 500 – If the issue price is ₹500 and more, then the face value of shares must be between ₹10 and ₹1 per share.
2) Face Value <₹ 500 – If the issue price is below ₹500, then the face value must be ₹10 per share.

Read More: Why Is Ant Group IPO Making A Buzz?

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

Curiopedia
  • Bootstrapping in business means starting a business without external help or working capital. This financing approach allows owners to maintain control of their business and forces them to spend with discipline. In addition, bootstrapping allows startups to focus on customers rather than investors, thereby increasing the likelihood of creating a profitable business.
  • Book building is a systematic process of generating, capturing, and recording investor demand for shares. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner.
  • The Whopper is the signature sandwich and an associated product line sold by international fast food restaurant chain Burger King. The hamburger is well known in the fast-food industry, with Burger King billing itself as “the Home of the Whopper” in its advertising, signage, and in its concept store, the BK Whopper Bar.

Benchmark Gains in the Share Market due to New Launched IPO’s

As investors chase companies running niche businesses and newly launched public companies the S&P BSE IPO Index, has risen more than three times the amount of the S&P BSE Sensex Index this year.

Crux of the Matter
  • India Mart, IRCTC, Metropolis Healthcare Ltd are among 11 companies that went public this year.
  • IRCTC more than doubled on its debut which ranks as the best listing in two years. It is due to its monopoly over the Indian Railways.
  • IndiaMart the country’s largest online platform for businesses has been trading 78% higher than its July IPO.
  • Metropolis Healthcare Ltd. soared more than 60% from its offer price in April.
  • It has been a rough ride for the Sensex, which had hit a six-month low in mid-September amidst a slow-moving economy.
Curiopedia

Initial Public Offering (IPO) is the first time that the stock of a private company is offered to the public and IPOs are often issued by younger, smaller companies seeking capital to expand, but they can also be done by large privately-owned companies. After the IPO, shares are traded freely in the open market. Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information. Details of the offering are disclosed to potential purchasers in the form of a document known as a prospectus. More Info