Special purpose acquisition companies (SPACs) have generated a lot of buzz recently, and for good reason. According to SPACInsider, they collectively raised more than $83 billion in capital in 2020 for mergers and acquisitions, primarily helping private companies go public.
The growing popularity and credibility of SPAC transactions is inevitably pushing this capital markets option into private company discussions about how best to land a stock exchange listing. A closer look at this recent phenomenon can help inform these discussions.
Investment Wallflower Turned Potential Darling
Known as “blank check companies” in the 1980s and rebranded as SPACs a decade later, these sources of private capital didn’t originally enjoy widespread investor interest or confidence. However, over time, the quality of these transactions and participants improved along with their reputations.
The Nasdaq has listed SPACs on its exchange since 2010. In May 2017, TPG Pace Energy Holdings (TPGE) became the first SPAC to be listed on the main New York Stock Exchange (NYSE).
Grand Entrance into the Market
A SPAC is created by a sponsor, which today is often a respected financial institution, investment house or a private investor with experience leading publicly held companies. Its sole purpose is raising capital through an IPO to acquire one or more existing companies.
At the time of the IPO, the acquisition target isn’t known or identified, although the industry or interest of the sponsor may be apparent as it’s often rooted in their area of expertise. For example, as its name suggests, TPGE was focused on acquiring firms in the energy sector.
Capital raised by a SPAC’s IPO is placed in a trust account while the sponsor searches for one or more promising companies to acquire. The SEC explains that, “A SPAC will typically provide for a two-year period to identify and complete an initial business combination transaction.” If that timeline isn’t met, the money held in trust is returned to existing shareholders.
Once the SPAC identifies a potential target, it conducts due diligence and negotiates the terms of the merger. When the deal closes, the once-private company becomes publicly traded under the SPAC’s market listing.
Depending on the mutual terms of the deal, the acquired company’s leadership may remain at the helm, a new team may be installed, or a combination of the two may manage the new entity.
SPACs and Their Big Splash
SPACInsider identified 34 SPAC IPOs in 2017, which raised just over $10 billion in capital. By 2019, 59 were initiated for $13.6 billion in capital. And then came 2020, when SPAC IPOs more than quadrupled to 248, and raised the record setting $83 billion. In fact, this form of strategic transaction comprised more than half of all 2020 IPOs, according to Audit Analytics.
A number of factors are driving this surge in SPAC popularity as a legitimate means of going public, which includes:
- Fundraising facilitation: The burden and cost of raising capital fall to the SPAC.
- Volatility mitigation: Even in unstable times like a pandemic, private companies can access readily available capital.
- Ready expertise: Throughout the SPAC transaction, the seller gains a partner with past public company management experience, SEC registration knowledge, and industry talent.
- Cash to grow: The injection of capital can help a private company fulfill its own plans for acquisition and growth.
- Longer-term outlook: A SPAC’s use of permanent capital to fund the deal gives it more time to create value and meet its ROI goals.
The Search for the Perfect Fit
Just as with the traditional IPO route, a SPAC transaction includes key challenges that fall into two periods.
Public Company Readiness Phase
Private companies interested in the SPAC route need to take a closer look at their internal operations, particularly their personnel, processes, controls, systems, and data. This introspection often requires the help of an outside advisor to help ascertain a firm’s ability and readiness to smoothly transition to public company scrutiny and compliance.
Deal Completion Phase
SPACs often search for 18 or 20 months for the right target company, leaving only four to six months to close the deal. During that accelerated time frame, the private company has a major project on its hands that includes the following:
- Assessing the experience, philosophy, and intent of the SPAC as a good fit
- Preparing public-company compliant, GAAP-based annual financial statements (and interim financial statements for required periods)
- Completing audits and interim period reviews for the proxy statement
- Preparing the accounting and financial sections of the proxy statement
- Further evaluating and updating all processes, systems, controls, and cybersecurity for SEC compliance and other regulatory requirements
Completing these tasks often requires the help, counsel and staff of a skilled advisor.
Corporate Happily Ever After with a SPAC Transaction?
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