Going public through mergers with special purpose acquisition companies

• Published date: 01 September 2021
• Author: Hyunseok Kim,Jayoung Ko,Chulhee Jun,Kyojik “Roy” Song
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/irfi.12297

ORIGINAL ARTICLE

Going public through mergers with special

purpose acquisition companies

Hyunseok Kim

1

| Jayoung Ko

1

| Chulhee Jun

2

|

Kyojik “Roy”Song

1

1

Business School, Sungkyunkwan University,

Seoul, Republic of Korea

2

Department of Finance, Bloomsburg

University, Bloomsburg, Pennsylvania

Correspondence

Kyojik “Roy”Song, Business School,

Sungkyunkwan University, 25-2

Sunkyunkwan-ro, Jongno-gu, Seoul 03063,

Republic of Korea.

Email: roysong@skku.edu

Funding information

National Research Foundation of Korea,

Grant/Award Number: NRF-

2016S1A5A2A01023922

Abstract

In this study, we find that private operating firms with larger

controlling shareholders' ownership merge with special pur-

pose acquisition companies (SPACs) rather than take the

conventional initial public offering (IPO) route to go

public in Korea. This finding indicates that compared to

U.S. SPACs, the controlling shareholders' motive to avoid

their ownership dilution makes SPAC mergers popular in

Korea. In addition, we document that the merged firms do

not reveal difference in stock and operating performance

over the long run compared to conventional IPO firms.

However, SPAC mergers incur higher direct cost and do not

generate marketing benefits for the listing firms.

KEYWORDS

controlling shareholders, going public, merger, special purpose

acquisition company

JEL CLASSIFICATION

G30

1|INTRODUCTION

Going public is one of the major events in a firm' growth because it provides the firm with the opportunity to raise

external capital from capital markets, and also provides the firm's existing shareholders with liquidity. While private

operatingfirms can obtain public statususing the conventionalmethod of initial public offerings(IPOs), they may access

public markets using a popular nontraditional route, a reverse takeover, in which they acquire or merge with publicly

listed shell companies. Shells are usually listed firms that have minimal amount of valuable assets or have sold a large

Received: 25 December 2018 Revised: 20 November 2019 Accepted: 25 December 2019

DOI: 10.1111/irfi.12297

© 2020 International Review of Finance Ltd. 2020

742 International Review of Finance. 2021;21:742–768.wileyonlinelibrary.com/journal/irfi

part of their assets.Recently, many private operatingfirms in the United States have gone public via a businesscombi-

nation witha new type of cash shell known asa special purpose acquisitioncompany (SPAC). The businesscombination

with a SPAC is a form of reverse takeover, but with lower risks, which makes it far more attractive than that with an

ordinary shellfirm. In addition to publicstatus, the business combination with a SPAC bringsan immediate and substan-

tial capitalinfusion into the target firmand often includes guidancefrom a knowledgeable management team.

Although SPACs have existed in different forms in the United States for years, new-generation SPACs became

popular after the introduction of Rule 419 Blank Check Offering Terms in 2003 (Cumming, Haß, & Schweizer, 2014).

Over the period of 2003–2015, 230 SPAC IPOs and 130 SPAC acquisitions are identified in the U.S. capital markets

(Kolb & Tykvova, 2016). In the peak year of 2007, 66 SPACs went public and accounted for approximately 22% of

all IPOs. Following SPACs' entrance in the U.S. market, they have risen in Australia, Canada, New Zealand, Malaysia,

and some countries in Europe. Yet, reverse takeovers via SPACs have not been generally active in those countries.

For example, only 19 SPACs attained public listing status over the period of 2005–2011 in all European capital mar-

kets (Ignatyeva, Rauch, & Wahrenburg, 2013). Therefore, most of academic studies on SPACs have investigated the

U.S. sample. However, the corporate structure and security design of SPACs and regulation may be different across

countries, and thus empirical studies based on U.S. SPACs can be limited. Outside the United States, SPACs have

been successfully introduced to capital markets in South Korea.

In this study, we investigate the unique structure of Korean SPACs comparing to U.S. counterparts, firm charac-

teristics, and post-merger performance to explain success factors despite a short history and a smaller size of capital

markets. Over the sample period of 2010–2017, we find that 127 SPACs went public and raised about 1.7 trillion

won (approximately 1.5 billion U.S. dollars) in their IPO process, and accounted for 28.2% of 450 IPOs (127 SPAC

IPOs and 323 traditional IPOs) in KOSDAQ (Korea Securities Dealers Association) market.

1

The SPACs are allowed

to be only merged with private operating firms within the 3-year period in Korea. Of 127 SPAC IPOs, 57 SPACs were

successful in merging with private operating firms, 20 SPACs were liquidated, and 50 SPACs were looking for the

business combination with unlisted firms as of the end of 2017.

2

Since 2010, relatively small firms have used SPAC

mergers as a route to be listed in the KOSDAQ because SPAC mergers are quicker and less stressful than the tradi-

tional IPO process. Successful introduction of Korean SPACs to capital markets is remarkable, considering SPACs in

Europe and other countries except for the United States have had minimal impact.

We first analyze the determinant of the choice of merging with SPACs or taking the conventional IPO route for

exchange listing. In East Asia like Korea, firms are often controlled by families (see e.g., Classens, Djankov, & Lang,

2000; La Porta, Lopez-de-Silanes, & Shleifer, 1999). Chang and Shin (2007) report that the average of controlling

family ownership for public firms in Korea was 29.51%, compared with controlling families' cash-flow rights of

8.42%. The private benefit of control is also relatively high in Korea. Nenova (2003) finds that the value of corporate

control amounts to about 34% of firm market value in Korea, as compared to about 2% in the United States. Tradi-

tional IPO firms tend to raise more capital by diluting existing shareholders' ownership more, compared to SPAC

merger firms in the process of going public. Compared to the U.S. counterpart, Korean SPACs raise relatively small

amount of proceeds at their IPOs (approximately 12 million U.S. dollars on average) and thus SPAC investors reap a

small percentage of ownership of merged firms when they merge with private operating firms. Therefore, we conjec-

ture that private operating firms with larger controlling shareholders' ownership would select SPAC mergers to pro-

tect the control right of their largest shareholders. We find that the firms with larger controlling shareholders'

ownership tend to merge with SPACs rather than take the conventional IPO route and dilute less ownership in the

process of going public, which is consistent with our conjecture.

Prior to 2010, venture capitalists have used reverse takeovers as an exit method from their portfolio companies

in Korea (Song, Kim, & Chang, 2014). Over the period of 2010–2017, we find that private operating firms with ven-

ture capital (VC) investing tend to choose the merger with SPACs to go public since reverse takeovers has almost dis-

appeared over the period. These findings suggest that venture capitalists tend to lead their portfolio companies to

merge with SPACs to expedite their exit from the companies. This evidence has not been found in the previous liter-

ature which has investigated American SPACs.

KIM ET AL.743