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In late 2019, daily fantasy sports company and bookmaker DraftKings
announced a merger with a special purpose acquisition company (SPAC),
allowing it to become public while forgoing the typical IPO process.
DraftKings combined with Diamond Eagle Acquisition Corp., a SPAC with a
market cap of roughly $500 million, and SBTech, a betting and gaming
technology company (Pound, 2019). A company might choose to go public
through a SPAC versus an IPO because the process can be accomplished
more quickly, with fewer associated costs and extensive financial
disclosure requirements than an outright IPO (Jackson, 2021). In
addition to the benefits of the streamlined process, a SPAC can also
look attractive to firms that have previously failed to successfully
merge with another company. DraftKings and rival FanDuel gained
popularity earlier in the decade for their daily fantasy sports products
and explored a merger but dropped the idea in 2017 following pushback
from the Federal Trade Commission (Pound, 2019).

Because SPACs
allow all investors to invest in them from the start, this helps level
the playing field and allows everyone to benefit from stock growth
similarly (Jackson, 2021). A great example of this is DraftKings, which
went from a $10 offering price to being priced at over $71 a share by
mid-March 2021 which is a spectacular gain for initial investors who
cashed out at the peak (Baluch, 2021). Investing in a SPAC, though, is
not without risk as SPAC mergers may enrich insiders through unique
incentives while often sticking individual investors with losses if
shares struggle. SPAC creators are typically protected by the right to
buy a large chunk of shares at a steep discount, while savvy
professional investors often quickly sell their SPAC shares before deals
are completed to minimize losses (Ramkumar, 2021).

Though most
SPACs start out with share prices of around $10, this price can rise
substantially due to the fame of those behind them or the announcement
of their target acquisitions. If you end up paying more than the initial
offering price of a SPAC, you could stand to lose more than your
initial investment if no deal materializes since you’d only recoup the
$10 per share price, minus expenses (Jackson, 2021). While DraftKings
serves as a great example of the value that can be leveraged out of a
SPAC, cons of SPAC investing can also be characterized by DraftKings.
Shortly after hitting a peak of almost $72 per share, the stock price
dove to just around $40 by mid-May 2021 (Baluch, 2021).


Baluch, A. (2021, July 20). Council post: Spacs demystified for business owners. Forbes. Retrieved September 27, 2021, from https://www.forbes.com/sites/forbesbusinesscouncil/2021/07/20/spacs-demystified-for-business-owners/?sh=1a39096c10c9.

Jackson, A.-L. (2021, August 25). Special purpose acquisition company: What is a Spac? Forbes. Retrieved 2021, from https://www.forbes.com/advisor/investing/spac-special-purpose-aquisition-company/.

J. (2019, December 23). Fantasy Sports Company and bookmaker DraftKings
to become public company. CNBC. Retrieved 2021, from https://www.cnbc.com/2019/12/23/draftkings-to-become-public-company-forgoing-traditional-ipo.html.

Ramkumar, A. (2021, May 19). SPAC Selloff Bruises Individual Investors. The Wall Street Journal. Retrieved 2021, from https://www.wsj.com/articles/spac-selloff-bruises-individual-investors-11621396808.


Virgin Galactic, Richard Branson’s space tourism company went public
with a SPAC (Social Capital LP) in 2019. After starting out as the
fastest-growing commercial space segment against SpaceX and Blue Origin,
a fatal accident in December of 2014 turned things around for the worst
(Farrell, 2019). This fact undoubtedly made the route of a traditional
IPO more difficult, and, with former Facebook executive Chamath
Palihapitiya’s SPAC coming up on its 2 year deadline to find a company
to buy and take public, the merger moved forward (Farrell, 2019). Virgin
Galactic’s CEO George Whitesides highlighted that it would require less
managerial effort and less time to go public (Shen, 2019).
Interestingly, after beating Jeff Bezos into space, Branson sold off a
bunch of his shares in Virgin Galactic, leaving him with a stake of 18%,
with the intent to use proceeds to bolster the Virgin portfolio that
was hit hard by the pandemic (MacDonald, 2021).

Overall, SPACs
do come with an additional element of risk that should be weighed when
comparing these investments to a traditional IPO. For example, a company
going the route of a traditional IPO is subject to scrutiny to weed out
companies, lowering the risk. Additionally, SPAC sponsors can
potentially dilute the stock for the target company for the investors by
being able to purchase shares at a much lower rate (TD Ameritrade,
2021). These factors do cause SPACs to be a greater risk for certain
investors. However, with a strong management team, the potential to
really capitalize on something lucrative early, and the opportunity to
sell shares once the target company is announced, it can make sense for
some investors and some portfolios (TD Ameritrade, 2021).


Farrell, M. (2019, July 9). Richard Branson’s Space Unit to Go Public. The Wall Street Journal. https://www.wsj.com/articles/bransons-space-unit-to-go-public-11562644860

MacDonald, A. (2021, August 13). Richard Branson Reduces Stake in Virgin Galactic. The Wall Street Journal. https://www.wsj.com/articles/richard-branson-reduces-stake-in-virgin-galactic-11628890369

Shen, L. (2019, October 29). Virgin Galactic CEO: Here’s Why We Sidestepped a Traditional IPO. Fortune. https://fortune.com/2019/10/29/virgin-galactic-ceo-sidestepped-traditional-ipo/

TD Ameritrade. (2021, January 21). What is a SPAC? Special Purpose Acquisition Companies Explained [Video]. YouTube. https://www.youtube.com/watch?v=40IywkBBcQQ

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