What is SPAC vs IPO vs Primary Direct Listing? (and why Grab chose SPAC)

PHOTO: The Business Times

Last week, Grab made headlines by clinching a ~US$40 billion (S$53 billion) valuation and raising more than ~US$4 billion by going public.

In the same week, cryptocurrency exchange platform Coinbase went public with a closing share price at ~US$328 and a valuation of US$85.8 billion.

However, these two fintech companies chose different routes to go public.

Grab went by the way of SPAC, or Special Purpose Acquisition Company. Coinbase went with Primary Direct Listing.

Both companies eschewed the traditional way to go public, which is by an Initial Public Offering, or IPO.

What’s the difference between SPAC, IPO, and Primary Direct Listing, and what does it all mean for everyday investors like you and me?

Why do companies want to go public?

At its core, the reason why companies go public is simple: expansion.

Many startups start out with private funding to get their operations, service, or product up and running. When the money runs out, they may go through a couple more rounds of funding — Series A, B, C and so on — to sustain their growth. 

After a certain point, private companies might hit a plateau with regards to their financial growth, because for it to grow more, it will require a lot more capital. 

As a result, they offer their privately-owned shares to the public via an IPO, SPAC or Primary Direct Listing.

Summary: SPAC vs IPO vs Primary Direct Listing

SPAC IPO Primary Direct Listing
Purpose Raising funds Raising funds Raising funds or offering existing shareholders liquidity
Timeline Three to six months after acquisition agreement 12 to 18 months Three to six months
Share Pricing Flexibility Privately negotiated between shell company and acquired company Flexible within or just outside of disclosed range No flexibility
Fees Two per cent underwriting fees at the initial phase, 3.5 per cent after the merged phase Seven per cent underwriting fees 0.5 per cent to 1.5 per cent financial advisory fees
Volatility  Medium Low High

Do note that the figures in the above mentioned table are trends and estimates, as the market fluctuates according to prevailing demand.

Why have companies traditionally gone public with an Initial Public Offering (IPO)?

IPOs have been the standard when a privately-owned company wants to expand and go public. As its name implies, it’s when a company offers its privately-owned shares for public investors to buy. 

In return, the company invests in their money to do a variety of things — buy new equipment, improve their infrastructure, hire new staff, pay off debt, whatever — in the name of raising the value of their shares. 

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It’s seen as a good thing when a company decides to go public. It means that the company is successful enough for expansion, and that the company’s business value proposition is sound enough for public investors to put their money into. 

It’s also good for the entrepreneurs who started that company, because it usually means a large cash payout.

IPOs have been the go-to method of making a company publicly-owned because of its rigorous process. This process has been designed to build investor confidence, and is especially useful for relatively unknown private companies to establish their footing in the stock market.

The summarised process is as follows:

  1. Choose preferred investment bank (Goldman Sachs, JP Morgan, etc) to underwrite IPO processes
  2. Do due diligence by preparing relevant documents and information for filing with the authorities
  3. Set the share price according to reference range provided by the investment bank and authorities 
  4. Stabilise the share price for public investors to buy into after first issuing it on the stock market, for 25 days
  5. After stabilising the share price for 25 days, the underwriters provide estimates of the company’s earnings, and then the share price transitions to market conditions and competitions

This is an extremely pared-down summary of what goes into an IPO, and this process easily takes about 12 to 18 months.

Many stakeholders are involved in this process, with the logistics of not only filing the documents and information, but also the marketing needed (usually via roadshows) to put these companies on the radar of public investors.

It is also relatively expensive to underwrite the IPO, with investment banks typically charging seven per cent of the profits reaped from the IPO. Maybe this is where Kris Jenner got inspiration to charge her daughters 10 per cent from their business acquisitions.

What is a Special Purpose Acquisition Company (SPAC), and why did Grab choose to go public with SPAC?

A SPAC is somewhat similar to an IPO, where the company initially offers its shares to the public to raise capital. 

Unlike IPOs, where the company spends its time building investor confidence by proving its business model, a SPAC is sort of a short-cut.

A SPAC is a shell company with money (but no operations), looking to merge with a “real” company who needs funds to expand. Hence, the merger between Grab and Altimeter Growth Corp (the SPAC in question).

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Without going into too much detail, Altimeter Growth Corp has done the legwork of raising capital via its own IPO. Then they merge with Grab, and that allows Grab to bypass much of the IPO process than if they were to do it themselves.

We don’t know the entire timeline of the SPAC merger between Grab and Altimeter Growth Corp yet, but based on the Harvard Law School Forum on Corporate Governance’s SPAC diagram, we would estimate three to five months.

The benefits of Grab’s SPAC are clear — it’s time- and cost-efficient for the company that’s looking to go public. Grab easily shaves off at least 12 months from doing it themselves, plus the underwriting fees are also cheaper than that of an IPO. 

Instead of paying seven per cent underwriting fees (as with an IPO), Altimeter Growth Corp only pays 2.5 per cent, whilst the Grab and Altimeter Growth Corp merger only pays 3.5 per cent. In theory, this allows for public investors like you to buy shares at a lower price. 

You probably have a few questions by now:

  1. If the company I’m investing in is a shell company, doesn’t it mean that the company has no tangibles like a product, service or operation during its IPO?
  2. If so, how will I know that this shell company can acquire or merge with an actual company with tangible operations, products or services?
  3. If the acquisition or merger is successful, how will I know that the actual company is promising?

These are all valid questions to have, which is why you must do your research. Of particular interest is if the SPAC IPO you’re investing in has a specified industry focus — Altimeter Growth Corp specifically mentioned that it was “formed to invest in and help bring a world-class technology company to the public markets”.

What is a Primary Direct Listing, and why did Coinbase go public via that route?

The process for a company going public via primary direct listing couldn’t be more different than via IPO or SPAC.

As its name implies, companies who use this route skip the IPO process and immediately list their shares at market price.

When a company does this, it’s typically to provide their shareholders liquidity (easy conversion to cash) and make the share-buying process more accessible for individual investors like you and me. 

With an IPO or SPAC, underwriters set aside some shares for institutional investors — such as BlackRock and Temasek Holdings, in the case of Grab and Altimeter Holdings Corp. There’s no such allotment in the case of a primary direct listing.

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Some of the most famous companies we know have gone public through direct listing. For example, Spotify went public in 2018, while Slack (the office productivity app that everyone has grown to loathe) followed suit in 2019. 

While its benefits are clear for the individual investor, such as liquidity, accessibility and transparency via market-based pricing, it’s also subject to increased volatility because there is no price stabilisation prior to transitioning to market-based pricing like IPOs have.

That being said, the same Harvard paper said that Spotify’s and Slack’s volatility was “relatively low”, but also cautioned against putting too much stock into this because of the “very small sample size of direct listings to date”.

In a way, the principles of liquidity, accessibility and transparency via market-based pricing in primary direct listings suit the business value proposition of Coinbase. After all, cryptocurrency started out with these three principles in mind and is designed to give more power to the user.

However, with more power comes more responsibility, which is why you must do your due diligence to make informed decisions before taking on the risk yourself.

SPACs, IPOs and Primary Direct Listings are tools for companies to go public

You’re probably wondering what everything you’ve read above has to do with you. 

The key takeaway for individual investors is that not all publicly listed companies are the same. As you can see, there are at least three different ways to go public, and not all are as rigorous as the traditional IPO.

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Whenever you hop onto a brokerage platform, you’ll see the price and historical performance of stocks. But to find out more about the company’s business fundamentals and how it went public, you will have to dig deeper on your own.

On top of it all, you also need to research the costs of investing — be it commission fees, custodian fees, Forex rates, dividend withholding taxes and expense ratios. 

I know, it’s a lot to take in! Worry not though, we’ve got lots of easy-to-digest articles on how to start investing for you to make an informed decision, and always exercise your own discretion.

This article was first published in MoneySmart.