It’s been a SPAC-tacular year, excuse the pun, for the trendy financial vehicles called special purpose acquisition companies (SPACs), which flip on its head the traditional process for becoming a publicly traded company.
On Thursday, Seattle’s Porch Group is slated to be among the first in this region to complete such a maneuver, as it gains a stock listing and CEO Matt Ehrlichman rings Nasdaq’s opening bell.
Porch — which connects homebuyers to services such as inspections, moving and insurance through Porch.com, and also provides software to run those service firms — is merging with an already-public company that has about $172 million in walking-around money but no business. Porch, by contrast, has a business but could use more money.
“The advantage of a SPAC is you can go public much faster,” Ehrlichman said in an interview.
Wall Street has wagered enormous sums on the appeal of this process, which in 2020 ballooned to 242 new SPACs totaling $81.3 billion, from 59 worth $13.6 billion the previous year.
According to SPAC Research, the boom in SPACs means currently there are 226 such shells packing a combined $72.5 billion in cash and looking for a match. A Bloomberg News commentator wrote this past week that a wave of money from hedge funds has enabled “a host of famous names from the world of business, finance and politics to launch their own SPACs this year.”
Traditionally, a business aspiring to sell shares and gain a stock market listing engages a fleet of investment bankers and lawyers, then starts the process of writing a prospectus with audited financial statements and disclosures that will meet the approval of the Securities and Exchange Commission.
But a SPAC, typically organized by a financial player such as a hedge fund, can do that fairly simply and quickly because there are few business details to disclose. Then it hunts for a merger partner and gets shareholder approval to consummate the deal.
Craig McCaw’s Kirkland-based private equity firm recently launched a SPAC called Holicity that said it would seek an acquisition in the “technology, media and telecommunications” industries but had “not selected any specific business combination target.” It raised $300 million.
Seattle-based Frazier Healthcare Partners this month raised about $120 million for its own SPAC, aimed at the biotech sector.
Porch, which announced its proposed SPAC combination last summer, started down that road “several months before I would say SPACs became hot,” according to Ehrlichman.
“Two, three, four years ago, there weren’t that many high-quality companies going that route,” he said. Before the current wave, “It was a signal that you couldn’t go public through a traditional IPO.”
That has apparently changed: Porch isn’t even the only company in the real estate sector to go public in this way just this month. OpenDoor, which buys homes online from owners eager to avoid the conventional selling process, said Friday it’s completed a SPAC merger that will bring it almost $1 billion in new capital.
Ehrlichman said that after Porch found its SPAC partner, a lot of the process was the same as a traditional IPO. There was a “road show” to make the company’s case to some 50 Wall Street investment firms — “all virtual, back to back to back on Zoom.”
But some things are different. Since it’s a merger, said Ehrlichman, Porch has a year to meet all the exacting Sarbanes-Oxley requirements for documenting that its financial controls comply with SEC rules. That would have delayed its ability to go public. “We would have been looking at 2021,” he said.
Another is that the original SPAC investors can vote with their wallets — if they don’t like the merger deal that’s been arranged, they can pull out. Ehrlichman said the deadline for doing so passed this week, and virtually all investors liked what they saw: Of the $172 million put into the SPAC, called PropTech Acquisition, “we had $4,000 in redemptions.”
Porch itself also has raised $150 million that will go into the company once the combination is closed. So Ehrlichman said he’s confident the whole transaction “leaves us really well capitalized so we can grow fast and acquire the right companies.”
At PropTech’s current stock price of around $12 on Friday, the combined company would have a market capitalization approaching $1 billion, he said.
Of course, what happens after that is anyone’s guess, as with traditional IPOs.