SPAC -- New Gateway for Russian Companies to Global Capital Markets

In the wake of a poor global IPO market, so-called special purpose acquisition companies (SPACs) are becoming more popular with investors in American and European markets. SPACs are newly founded shell companies which raise money in an IPO and follow the sole purpose of completing the merger or acquisition of a privately held company. Since the SPAC is already public, the privately held target company will automatically become publicly listed upon completion of the transaction. SPACs already raised funds of more than USD 12,000 million in 2007.

From an issuer's perspective, going public has become increasingly difficult, cost-intensive and risky. Especially fast growing small- and mid-sized companies from emerging markets which are aiming to raise capital through a listing in the European Union or the United States face material risk associated with legal hurdles, corporate restructuring measures and advisory costs, while they cannot be sure to finally succeed in selling their shares. In comparison, selling a company to a SPAC is neither difficult nor risky, but also results in a public listing. In fact, SPACs are highly motivated buyers, as the sponsors of a SPAC who are seeking the right investment will only be rewarded if they manage to complete a transaction within a certain time period (mostly between 18-24 months). The SPAC is furthermore well prepared to finance the merger or acquisition of a target company as it typically holds the proceeds from its offering in a trust account and may also offer stock to the owners of a target company.

Investors also like SPACs, because they get the opportunity to participate in a selected investment at an early stage, but compared to private equity investments, they may benefit from the liquidity and transparency provided by public listed shares. In difficult IPO markets, the management of a SPAC can bring companies public at a reasonable valuation, which gives substantial upside potential for the listed shares. Investors may also appreciate the chance to follow prominent market experts in taking an investment decision. The management of a SPAC is mostly composed of prominent sponsors such as Steve Wozniak, the co-founder of Apple, Dan Quayle, former Vice President of the United States or, as in a recent German case, the German top managers Florian Lahnstein, Roland Berger and Thomas Middelhoff. At the same time, the downside for investors is limited. If sponsors fail to present a suitable target company within a certain time period, investors are refunded. In case a target company is found, the SPAC will be required to seek shareholder approval.

The potential advantages or disadvantage provided by a SPAC certainly depend on its setup and may differ from case to case. However, a SPAC is generally suited to alleviating some of the typical risks -- for both investors and issuers -- associated with a public offering and direct listing of a company's shares. Therefore, one may expect that even after a recovery of the conventional IPO market, Russian companies seeking an international public listing will regard the SPAC model as a reasonable alternative and new gateway to enter European or American capital markets.