Reverse mergers and direct listings are alternatives to traditional IPOs for TMT companies. Most private companies will eventually list as the initial investors look to realize a return on their investment. Companies can list following the traditional process of going public in stock exchanges with support of financial and legal advisors, or as increasingly common take alternatives routes to list.
The first non-traditional route is a reverse merger with a special purpose acquisition company (SPAC). SPACs refer to shell corporations designed with the single goal of taking companies public without going through the traditional IPO process. Once SPACs have been funded, they generally have two years to find an acquisition target before they are liquidated and the funds returned to the original investors.
Another alternative way of listing is a direct listing, or direct placements. This process avoids the need for intermediaries such as investment banks, which typically charge underwriting fees of between 3% and 7%.
The non traditional routes to IPOs are very popular amongst TMT companies
Non-traditional routes to IPOs have gained popularity because they offer cheaper and faster alternatives to listing as compared to the traditional IPO process. For TMT companies, merging with a SPAC is a less intrusive way of listing with fewer disclosure requirements. Direct listings are also cheaper as they involve the sale of shares directly to the public, without any form of intermediary.
2021 saw SPAC mania and many notable direct listings
In 2021, at least 117 TMT companies combined with SPACs to go public, raising a total of $67.1 billion. Compared to 2020, the number of reverse merger listings increased four-fold. The three biggest SPAC merger IPOs in 2020 were Multiplan (raised $3.8 billion) , Fisker ($0.9 billion), and Open Door (raised $0.9 billion). In 2021 the biggest ones were Lucid moters (raised $4.6 billion), Grab (raised $4.5 billion), and SoFi (raised $2.4 billion).
All of these major SPAC megers were in the US. The country has provided a favourable environment for SPACs and US exchanges have also welcomed SPAC reverse mergeers. More recently, we have started to see SPAC merger IPOs in the Europe as well.
The trend of direct listings began with Spotify’s direct listing in New York in 2018. Exchanges in the US and Europe have seen at least 15 direct listings of TMT companies in 2021. The US IPO of Roblox and Coinbase Global were the biggest direct listings in 2021. American exchanges have welcomed direct listings, and 11 of 20 direct listings in the sector since 2018 were in the US.
We expect many more companies taking the alternative IPO routes in 2022
In 2022, we expect a growing number of TMT companies to shun the traditional IPO process and, instead go public by combining with a SPAC. Byju’s, the world’s biggest edtech company has chosen to merge with a SPAC to go public.
Other notable companies which have announce their plans to merge with SPACs include Polestar (electric vehicles), eToro Group (fintech), Bullish (blockchain), Pagaya Technologies (fintech), and Better.com (fintech).