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What's going on?

Legendary investor Bill Ackman is planning a $3.5 billion initial public offering (IPO) of a “blank check” company with a free rein to buy other businesses at will. Watch this space…

What does this mean?

A “special-purpose acquisition company” (SPAC) lists on the stock market in order to raise money from public investors. But it doesn’t actually do anything: it has no revenue or profit of its own. A SPAC’s only goal is to find another (usually private) company to merge with and effectively morph into. In a sense, it’s a less long-term version of the buy-and-hold strategy favored by another billionaire, Warren Buffett – only using public markets to finance purchases of private firms.

SPACs are tried-and-tested investment vehicles. For instance, space travel company Virgin Galactic last year “went public” by taking over an already-listed SPAC. After some administrative work changing the company’s name and stock ticker, investors could buy into Virgin Galactic directly.

Why should I care?

For markets: Got a license to Bill.

Blank check companies are popular on both sides of the pond: in the UK, Non-Standard Finance went public in 2015 as a SPAC focused on lending firms, prominently backed by (in)famous investor Neil Woodford. And their popularity’s growing: last year, blank check companies raised some $13 billion. One reason might be the discount to the value of the cash raised investors often get when they first buy in – which promptly disappears once it’s spent.

The bigger picture: Handshakes all round.

Private companies that are bought by SPACs get something out of the deal too. They end up with publicly traded shares and the opportunity to easily reach more shareholders without the rigmarole and expense of an IPO. Furthermore, having to negotiate a sale price with a single party – rather than numerous potential investors – helps reduce the chances of shares encountering wild initial swings in their value.

Originally posted as part of the Finimize daily email.

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