Ackman Sparks SPACs Replacement

Billionaire investor Bill Ackman opts for a SPARC instead of a SPAC to complete an acquisition.

Billionaire investor Bill Ackman became a mergers and acquisitions star with his special purpose acquisition company (SPAC), Pershing Square Tontine Holdings, which raised a whopping $4 billion in 2020.

However, the scenario turned bleak in mid-August, when former US Securities and Exchange Commissioner Robert Jackson, on behalf of investors, slapped Ackman with a lawsuit alleging that the SPAC is illegal and not properly registered as an investment company.

Ackman clapped back at the claims, while also distancing himself from the SPAC scene. To appease wary shareholders and stiff-arm Jackson, he came up with a new acronym—SPARC—special purpose acquisition rights company.

Unlike a SPAC, where cash is locked in while sponsors hunt for an M&A target, SPARC shareholders are given warrants that grant them the option to invest in the acquisition.

SPACs must ink a merger within two years—a headache for Ackman, who couldn’t seal a deal between Tontine and Universal Music Group (UMG). A SPARC doesn’t have a similar deadline requirement. This will “mitigate the harm” of the lawsuit, which hurts the M&A process, Ackman wrote in a shareholder letter.

If regulators approve the SPAC’s migration to a SPARC structure, shareholders will get their cash back along with a SPARC warrant for each SPAC share they owned.

Not having to lock up all those funds prior to a deal announcement “is an interesting concept,” says Stephen Drew of the Tribeca Global SPAC Fund. However, he still favors the previous model. “The current SPAC product is a great financial vehicle to bring companies public,” he says. “It’ll evolve to be even better over the years.”

Indeed, there are growing pains. In 2021, 19 class-action lawsuits concerning SPACs were filed in federal court. In 2020, there were five, according to insurance brokerage Woodruff Sawyer. These lawsuits are “a good thing for the industry,” says an unnamed CFO. “It’s going to weed out the bad players,” such as in the Nikola Corp. mess, where SPAC investors allege fraud.