Special Purpose Acquisition Company in Malaysia – Caveat Emptor

Posted by LIN Liye, Year 4 undergrad at the School of Economics, Singapore Management University

Recently, there was a prospective IPO by Red Sena, which is a F&B SPAC led by former Fraser & Neave Holdings Bhd (F&N) chief executive officer (CEO) Datuk Tan Ang Meng. This caught my attention as I was scouring through the net looking for risky corporate structures that could be misused against minority shareholders

Given that there are no assets, nor businesses, nor profits nor cash flows, investors that bought into the IPO are essentially buying into the execution abilities of the management team to acquire companies and build them up, much alike to private equity businesses. To me, I cannot understand why minority investors would want to take so much execution risk, in an unproven entity by a new management team as well.

There are many ways in which this kind of corporate structure can be abused. One of which is the overpaying for acquisitions of companies to related parties, or overpaying for acquisitions while receiving kickbacks in a separate deal. The second will be that a large proportion of costs will be assigned to the salaries of these highly paid management teams, which could prove to be a drain on funds and much needed cash.

http://dayagroup.com.my/wp-content/uploads/2014/01/Demand-for-shares-of-SPACs-continues-to-be-strong-Business-News-_-The-Star-Online.pdf

https://forum.lowyat.net/topic/2912864/all

Description: This is a writeup on SPACs, or special purpose acquisition companies, that are common in Malaysia’s equity markets.

What is so unique about these structures is that a SPAC is a firm that is listed with no core operations but is formed specifically for the purpose of making acquisitions from the cash raised via the initial public offering.

Talk about risky investments!

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