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A blessing or a curse for Chinese companies

SPAC

Chelsea Xie Yang Sun Yudian Tang

2/17/13

Overview
What is a SPAC? Trading Mechanism of SPAC SEC Filings of SPAC Advantages and Disadvantages of SPAC Valuation Process Performance of Chinese Companies Conclusions
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What is a SPAC
SPAC--Specified Purpose Acquisition Company

organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in a specified industry. A corporation formed by private individuals to facilitate investment through an initial 2/17/13 public offering (IPO). The proceeds are used

What is a SPAC
Similar to a Blank Shell Company
A new shell company is a company that

exists but does not actually do any business or have any assets
Shell companies are often formed by

individuals and businesses to conduct legitimate transactions, such as domestic and cross-border currency and asset transfers, or to facilitate corporate mergers and reorganizations. Company of its own
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Instead, SPAC creates a new Shell

What is a SPAC
Issue common stocks or units to qualified investors
SPACs trade as units and/or as separate

common shares and warrants

Nowadays, SPAC offerings are commonly

sold in $810 units which consist of one common share and one warrant.

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What is a SPAC
No operation
the Shell has never had business in the

past
The Shell does not have any assets, or

debts, only has cash

Its only purpose is to go public with the

intention of merging with or acquiring a company with their funds

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What is a SPAC
Limited Life Charters
Must sign letter of intent for a merger or

acquisition within 12/18 months of the IPO with transaction close within 24 months.
Incorporated with 24-month limited life

charters: require SPAC to automatically dissolve if unsuccessful

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Trading Mechanism
Shell Company Investors

Investment Banks

Target Company

Stock Exchange

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Trading Mechanism
The Unit
A $6.00 Unit consists of one share of

Common Stock and two Warrants. Common Stock and one Warrant. Common Stock and one Warrant.

A $8.00 Unit consists of one share of A$10.00 Unit consists of one share of Each Warrant entitles the holder to

purchase one share of Common Stock at 2/17/13 a price of $5.00, $6.00 or $8.00.

SEC Filings ( Rule 419 )

Rule 419 (an SEC rule) requires that the

blank check company deposit the securities being offered and proceeds of the offering into an escrow or trust account pending the execution of an agreement for an acquisition or merger. release of the offering funds in conjunction with the post effective acquisition or merger

The rule provides procedures for the

Notable:

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SPAC - Advantages
Comparison with IPO:
Lower capital requirement (less than

$5M)
Shorter period (1 year less than normal

IPO)
Able to control the risk Lower costs/fees (1/5 of normal IPO) New entity could also engage in RM

bypassing the usually lengthy 2/17/13 and

SPAC - Advantages
Comparison with RM:
No debt and legal issues with Shell check

companies
Higher cash level Raise more money than reverse mergers

at the time of IPO (Average $115M V.S. $5.24M through RM) reverse mergers

Risk factors are lower than standard

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SPAC - Disadvantages
Lower IPO price for Shell check company The initial company could not directly get

listed on Nasdaq
Main investors are PE and hedge fund Dilution due to management and sponsor

shares (20%)

Low visibility on future acquisition(s) at

the time of the SPAC public offering

Limited liquidity of their securities 2/17/13

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Why SPAC

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Comparison

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Valuation Process
The model we use

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Valuation Process

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Valuation Process

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Valuation Process

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Performance of Chinese Companies

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Conclusions
1. More of arbitrage instead of growth 2. Companies have to balance between the

benefits and costs

3. Good performance in SPAC may be a bad

sign for companies

4. Lack of experience and risk management

skills

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