What it means
A ticker is the short code under which a company's shares trade on an exchange. Codes can be reused, reassigned or changed over time, so a four-letter code should always be checked against the current issuer before you rely on it.
For this reason, finance professionals confirm the full company name and exchange alongside any ticker. A SPAC, sometimes called a blank-cheque company, has no operating business when it lists.
It sells units (usually a share plus a fraction of a warrant) to investors at a standard price, often $10, places the cash in a trust account and then has a limited time to find a target business. If it does not complete a deal by the deadline, the money is generally returned to shareholders.
The people who set up a SPAC are called sponsors. They typically receive founder shares for a small payment, which can become valuable if a deal is completed, and this means their incentives are not identical to those of outside investors.
Investors usually have the right to redeem their shares for their share of the trust cash before a merger is approved. When a SPAC finds a target, the two merge in a transaction sometimes called a de-SPAC, and the private company becomes a listed company without a traditional initial public offering.
Compared with that route, a SPAC merger can be quicker and allows the target to negotiate its valuation directly. Regulators have increased attention on the disclosures made in such deals, particularly forecasts.
The nuance for an investor is that a SPAC share before a deal is mainly a claim on trust cash plus an option on the sponsor's deal. After a merger, the share becomes an ordinary equity in an operating business, and the risks change sharply.
Redemptions, warrants and sponsor shares all dilute the value per share, so read the filings carefully.
In practice
Real-world examples.
Example
An investor sees the ticker DAOO in a news feed and, before acting, looks up the issuer name and exchange. Finding a blank-cheque company with cash in trust, she reads the prospectus to see the deadline for a deal and the redemption rights. She decides the risk of a long wait does not suit her.
Example
A private software company is approached by a SPAC offering a faster route to listing. The finance director compares the SPAC route with a traditional offering, weighing the certainty of the agreed valuation against the dilution from sponsor shares and warrants. She models the net cash after redemptions.
Example
A hedge fund buys SPAC units close to trust value because the downside is limited by the redemption right. The fund sells the warrants separately and uses the proceeds to reduce its cost. It earns a small return on the trust interest while it waits.
Formula
Calculation
Trust value per share = trust account balance / public shares outstanding
Suppose a SPAC raises $230,000,000 by selling 23,000,000 units at $10 and places the full amount in trust. Trust value per share = 230,000,000 / 23,000,000 = $10.00. If the trust earns $2,300,000 of interest over the period, value per share rises to 232,300,000 / 23,000,000 = $10.10. If 40% of public shares are redeemed before the merger, only 60% x 23,000,000 = 13,800,000 shares remain, and the target receives about 13,800,000 x 10.10 = $139,380,000 of cash.Case study
Seen in the real world.
Greenfield Digital Holdings is an illustrative, fictional SPAC that raised $150,000,000 to search for a financial technology target. Its sponsors had two years to complete a deal, and for the first year the shares traded close to the $10.00 trust value.
The sponsors announced an agreement to merge with a payments start-up. Excited investors pushed the share price to $12, but at the vote 70% of public shareholders chose to redeem for their trust cash, leaving only about $45,000,000 for the merged company instead of the $150,000,000 expected.
The start-up had to rework its plans and sought extra funding from private investors on worse terms. In this illustrative story, the lesson is that the headline size of a SPAC is not the cash the target will actually receive.
Watch out
Common mistakes.
- Assuming a ticker always refers to the same company, when codes can be reassigned or changed after mergers, delistings or liquidations.
- Treating a SPAC's headline fundraising as the cash a target will receive, when redemptions can remove most of it before the merger closes.
- Ignoring the dilution from sponsor shares and warrants, which reduces the value per share after a deal.
Questions
People also ask.
What does DAOO refer to?
It has been used as the ticker of Crypto 1 Acquisition Corp, a SPAC, but you should confirm the current issuer and listing status before relying on any ticker.
What happens if a SPAC does not complete a deal?
It usually has to liquidate and return the trust money to public shareholders, although the sponsors lose their investment in founder shares.
Can I get my money back before a merger?
Public shareholders generally have the right to redeem their shares for a share of the trust cash when a deal is put to a vote, subject to the SPAC's terms.
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