Definition
A SPAC (Special Purpose Acquisition Company) is a “blank check” company formed to raise capital via an IPO with the purpose of acquiring or merging with a private company, effectively taking it public without a traditional IPO.
Mechanics Step-by-Step
| Stage | Description |
|---|---|
| 1. Formation | A sponsor (investment firm or executives) forms a shell company, typically capitalized with ~$5–10 million. |
| 2. IPO | The SPAC raises funds (e.g., $300M) by issuing units (1 share + fraction of a warrant). IPO proceeds go into a trust account. |
| 3. Search Period | The sponsor has 18–24 months to identify a target private company for acquisition. |
| 4. Announcement & Vote | The SPAC announces a target, and shareholders vote on the “de-SPAC” transaction. Investors can redeem their shares for cash if they disapprove. |
| 5. PIPE Financing | To supplement redemptions, the sponsor often raises a PIPE (Private Investment in Public Equity) from institutions. |
| 6. De-SPAC (Merger) | Upon approval, the SPAC merges with the target, which becomes a publicly listed company. |
| 7. Post-merger Trading | The new entity trades under the target’s name; warrants often separate and trade independently. |
Sponsor Economics
Sponsors typically receive “promote” shares, equal to 20% of the post-IPO equity, for a nominal cost. This high-risk, high-reward structure can lead to misalignment if sponsors are incentivized to close any deal before their deadline.
Convertible Arbitrage
Definition: A market-neutral hedge fund strategy involving a long position in a convertible bond and a short position in the underlying equity to exploit pricing inefficiencies.
Mechanism: The trader buys the convertible bond (for its cheap optionality) and shorts the underlying stock (to hedge equity exposure). Profits are generated from mispricing, changes in volatility, or credit spread movements, not from the stock's direction.
Capital Structure Arbitrage
A broader strategy that trades on mispricings between different securities of the same company (e.g., shorting bonds while going long the equity if credit risk seems overpriced relative to the stock).
Definition
Also known as Merger Arbitrage or Risk Arbitrage, this strategy involves traders profiting from the spread between a target stock's price and the announced takeover price.
Mechanism
- Company A announces it will acquire Company B for $100 per share.
- Company B’s stock, previously at $70, rises to $95. The $5 gap represents the "deal risk" (the risk the merger fails).
- An arbitrageur buys Company B at $95, aiming to capture the $5 spread if the deal closes.
The main risk is the deal breaking due to regulatory issues, financing problems, or shareholder rejection.
Definition
- Cross-Listing: When a company’s shares are listed on more than one stock exchange (e.g., via depositary receipts like ADRs).
- Dual Listing: Two separate legal listings with full trading status on both exchanges.
Example
Alibaba has a cross-listing on both the Hong Kong Stock Exchange (HKEX) and the New York Stock Exchange (NYSE), giving it access to a broader investor base and higher liquidity.
Definition
Delisting is the removal of a company's shares from a stock exchange. A going-private transaction is when a public company is acquired (usually by management or a private equity firm) and ceases to be publicly traded.
Mechanism
The buyer offers a premium to the current share price, purchases all outstanding public shares for cash, and then deregisters the company with the securities regulator. The company becomes private, free from public disclosure requirements.
Example
Dell Inc. went private in 2013 in a buyout led by Michael Dell and the private equity firm Silver Lake. It later relisted in 2018.
Definition
Investors may sue companies, directors, or officers for issues like misrepresentation, fraud, or a breach of fiduciary duty. These are often filed as class-action lawsuits on behalf of all affected shareholders.
Common Causes
- Accounting fraud or misleading financial statements.
- Misleading earnings guidance or business projections.
- Breaches of duty during mergers and acquisitions.
Example
Following the accounting scandals at companies like Enron and Wirecard, investors filed major class-action lawsuits to recover losses, leading to significant legal and financial consequences for the companies and their executives.
Definition
Companies use equity compensation plans to incentivize employees and align their interests with those of shareholders.
Types of Plans
| Type | Description |
|---|---|
| Stock Options | The right to buy shares at a fixed strike price after a vesting period. |
| RSUs (Restricted Stock Units) | A grant of actual shares that are delivered to the employee after they vest over time. |
| ESPP (Employee Stock Purchase Plan) | Allows employees to buy company shares at a discount, usually via payroll deductions. |
Dilution
Issuing new shares for these plans reduces the ownership percentage and EPS of existing shareholders. Companies often manage this dilution by using share buybacks to repurchase shares from the market.
Definition & Purpose
A company repurchases its own shares from the open market to return capital to shareholders, increase EPS, or signal that management believes the stock is undervalued.
Mechanisms
Buybacks can be done via open-market repurchases, fixed-price tender offers, or Accelerated Share Repurchases (ASRs) arranged with investment banks. The repurchased shares are recorded as "Treasury Stock."
EPS Accretion Example
A company with $100M in net income and 100M shares has an EPS of $1.00. If it buys back 10 million shares, the new share count is 90 million, and the EPS increases to $1.11 ($100M / 90M), an 11% boost.
Example
Apple has spent over $600 billion on share buybacks since 2012, significantly reducing its share count and boosting its EPS.
Definition
Equity prices do not move in isolation; they are interconnected with interest rates, credit spreads, currencies, and commodities.
Mechanisms
| Driver | Impact on Equity Valuation | Example |
|---|---|---|
| Interest Rates | Higher rates decrease the present value of future cash flows, hurting equity valuations (especially for growth stocks). | The 2022 Fed hikes caused a sharp decline in tech valuations. |
| Credit Spreads | Widening spreads signal higher risk in the economy, leading to a "risk-off" sentiment that pushes equity prices down. | During the 2008 crisis, credit spreads exploded and equities crashed. |
| Currency Movements | A strong domestic currency hurts the earnings of multinational exporters, as their foreign revenues translate into fewer domestic dollars. | A strong USD can be a headwind for S&P 500 companies with large international sales. |
| Topic | Core Mechanism | Example |
|---|---|---|
| SPACs | IPO → trust → de-SPAC → merge | The SPAC boom of 2020-2021. |
| Convertible Arbitrage | Long convertible bond, short underlying equity | A classic hedge fund strategy. |
| M&A Arbitrage | Buy the target company, short the acquirer | Trading the Broadcom–VMware merger spread. |
| Cross-Listing | Listing shares on multiple exchanges | Alibaba (NYSE + HKEX). |
| Going Private | A PE buyout that removes a company's listing | Dell's 2013 transaction. |
| Share Buybacks | EPS accretion and capital return | Apple's massive buyback program. |
| Cross-Asset Interaction | Rates, FX, credit affect equity | Rising bond yields leading to a tech selloff. |