The way I understand it, when a SPAC goes public, it has a certain number of shares outstanding and trades around $10/share until it finds a company to merge with. Once a target company is selected, the SPAC mergers with the target and the target becomes a public company. Similar to an IPO, the target receives the SPAC's IPO proceeds as a source of funding and the SPAC shares are turned into target company public shares, diluting the target's current private shareholders.
But every SPAC has a set number of shares outstanding all set at a price of $10. If the SPAC merges with a target who's recent round of financing was at $100 per share, wouldn't the SPAC price trade up significantly once they merge with that target?
I'm confused how the SPAC share price is determined post-merger, since every target company has a different number of shares outstanding, while a SPAC has a set number of shares at a standard price. Thanks for your help.
I think you're getting a little bit too hung up on the number of shares outstanding part. The target can easily adjust the number of shares pre-deal. Instead, I would suggest thinking about the target in terms of Enterprise Value and Equity Value. The PIPE investors and the SPAC shareholders are going to receive ownership in the combined public company, diluting the target's pre-existing shareholders (just like you said).
The reason the SPAC trades around $10 a share pre-merger is because people can easily get their $10 back from the trust through voting powers. After the acquisition of the target (the de-SPAC transaction), all of that trust fund protection goes away, so the market determines the price of the company. The price can easily crash after the de-SPAC transaction, which has historically proven to be the case for most SPACs. Hope it helps.
Thanks, appreciate your reply. Can you elaborate on your point about the target easily adjusting the number of shares pre-deal. Aren't the target's shares fixed prior to the acquisition? The founders and each current private investor hold a certain number of shares and the target doesn't determine how many new shares are issued in the de-SPAC process, they simple absorb the number of common shares that are held in the SPAC.
Are you saying share count is irrelevant, it's simply based on discussions of what the post-money target valuation would be post-merger?
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