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Is $500 Million Enough for a Biotech-Focused SPAC?

By Brian Orelli, PhD and Keith Speights - Apr 18, 2021 at 8:43AM

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The eventual merger could involve a PIPE to help boost the capital available to the private company.

Last month, special-purpose acquisition company (SPAC) Revolution Healthcare Acquisition Corp. (REVH.U 0.00%) raised $500 million through its IPO to support a potential merger with a private healthcare company. In this video from Motley Fool Live, recorded on March 22, contributors Brian Orelli and Keith Speights discuss whether $500 million will be enough and what the SPAC can do to help boost the capital available to whatever company it eventually decides to take public.

Brian Orelli: Revolution Healthcare Acquisition Corp. only raised $500 million, which, to be honest, isn't a whole lot of money for a biotech these days. Do you think they can find something that cheap. You can talk about the other mechanisms that SPACs use to bolster their investments beyond with this SPAC actually has in cash.

Keith Speights: Yeah, I think that's the really big question here. Will Revolution Healthcare, first of all, be able to find any company that really meet their vision of what they're trying to achieve here, and can they do it for $500 million? That's going to be hard, I think. To do so, they might have to find some really early stage companies, again, that just introduces more risk to the equation. But you're right, $500 million is not an awful lot of money to scoop up another company in any industry, really -- for that matter, to take it public.

But they can raise additional money through a mechanism called PIPEs. PIPE stands for "private investment in a public equity." Basically, it just involves selling shares of a public company in a private arrangement to a select group of investors, one or more investors. So far, Revolution Healthcare has not announced a PIPE, although that's not surprising. I expect that they will probably announce some type of PIPE deal when they select their target company or companies to acquire, merge with, to go public. I do think that'll be a path they take and that will add to the amount they have. But still, usually, the PIPE amount isn't going to be as big as the amount they initially raised through their IPO. I think that's going to limit them in terms of what companies they can pursue. But maybe the kind of companies they're going after are going to be such early stage companies anyway that they'll have enough money. We'll see.

Orelli: Yeah, which, I don't know, that makes me a little less interested in investing, because as you said, it's introduced quite a bit of risks.

Speights: Yeah. I'm like you, Brian. I would prefer, really with any SPAC, but especially in a case like this, I would prefer to wait and see which company or companies, because sometimes it can be multiple, that they are going to merge with, and then evaluate whether or not this is a good investment or not. I have personally bought a couple of SPAC stocks in recent months, but it was only after I knew which company they were going to merge with and I really like that company's prospects.

Orelli: Yeah. I definitely think that's the way to go. I think the biggest advantages is the people who get in on the IPO level, because you're not a paying your premium. If you end up buying a SPAC after it's public, you're usually buying it for more than the value of cash in the company, which seems a little unreasonable to me. [laughs] I think, I agree that the way to go is to wait and see what is value the company that it's merging with.

Speights: Yeah, I totally agree.

Brian Orelli, PhD, Keith Speights, and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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