Editor’s Note: This blog series is presented in four parts. The first, below, is an introduction to a new strategy in the realm of IPOs, the special purpose acquisition company.
On February 29th, 2016, $450 million of investors’ money was raised in the initial public offering of Silver Run Acquisition Corporation.1 At the time it was the largest IPO of the year.2 Silver Run, however, was not a typical IPO candidate. The company had never made a sale, had no business to speak of, and had no assets on its balance sheet. So what was it that these investors were buying? At the most basic level, the answer is the experience and expertise of Silver Run’s CEO, Mark Papa.
Mr. Papa had started his career as a roustabout on a drilling rig in New Mexico.3 Over the years he worked at a number of oil companies before eventually winding up at a driller which was acquired by Enron in 1983.4 In 1999, Mr. Papa and his enterprise were spun out of that fated company, and EOG Resources was born.5 Under Mr. Papa’s leadership EOG would grow to become one of the 200 largest companies in world.6
Although Mr. Papa retired from EOG in 2013,7 he did not stay on the sidelines for long, utilizing Silver Run as the vehicle for his return. By putting their money in his newest endeavor, his investors are counting on Mr. Papa to be able to repeat his performance. Turning their cash into a formidable player in the energy market.
Silver Run exemplifies a relatively novel form of listing that is occurring on public stock exchanges. It is the reincarnation of a strategy that was utilized extensively by scam artists and conmen to swindle investors, and at the same time, a potentially fruitful source of growth capital for private enterprises. These special purpose acquisition companies (SPACs) have a checkered past, but are being increasingly adopted by honest and well-intentioned market operators.
SPACs are one version of a form of public listing strategy called “reverse mergers”. A reverse merger, at its most basic level, is a method by which a private company allows itself to be acquired by a company already listed on an exchange, in order to gain access to public markets. Thus, the reverse merger allows avoidance of the extensive IPO process normally required by regulators.8 The SPAC has become an increasingly common method for conducting these transactions. Shares in a SPAC are offered to investors in order for the SPAC’s managers to create a pool of capital with one goal: to find those companies that would benefit from listing, and to acquire them.
On their face, SPAC transactions provide a number of benefits to their managers, their investors, and to the acquired company. These advantages include the form’s cost savings, providing private-equity-like investment vehicles to the public, and the opportunity to take advantage of a successful manager’s extensive market knowledge. Theoretically, the SPAC form is a favorable alternative to other methods of reverse mergers, and to initial public offerings more generally.
Part two of this blog will discuss the history of the SPAC market generally, from its shady beginnings, through two waves of incredible growth, and to the form’s current posture in the marketplace. Part three will discuss the mechanics of a SPAC offering in order to provide much-needed background on a form of listing that has received limited academic consideration given its prominence. Part four will then consider the potential benefits of SPACs, to managers, investors, and acquisition targets. It suggests a number of reasons why SPACs are legitimately seen as an attractive option.
Lauren Hirsh, Silver Run raises $450 million in IPO to buy energy companies, Reuters, (Feb. 23, 2016) available at http://www.reuters.com/article/us-silver-run-acqsn-ipo-idUSKCN0VW2MX. ↩
See Christopher Helman, America’s Great Oil Companies, Forbes (Aug. 12, 2013) (“[U]nder [Mr. Papa’s] command EOG shares returned 650% in the past decade, more than any other sizable U.S. oil company. EOG’s market cap is closing in on $40 billion–more than Apache Corp. or Marathon Oil, and nearly triple the value of Chesapeake Energy. In five years EOG has increased its oil output at a compound annual rate of 37% to 190,000 barrels a day. “Mark has been very adept at seeing around corners in positioning the company,” says Pearce Hammond, an analyst at Simmons & Co.”). ↩
EOG is currently the 193rd largest company by market capitalization according to the Forbes’ Global 2000. See The World’s Biggest Public Companies, Forbes, http://www.forbes.com/global2000/list/#header:marketValue_sortreverse:true. ↩
Helman, supra note 3. ↩
U.S. Sec. and Exch. Comm’n, SEC Investor Bulletin: Reverse Mergers (2011), https://www.sec.gov/investor/alerts/reversemergers.pdf. ↩