A SPAC is a special purpose acquisition company that raises money from investors to determine a target company to acquire later. They typically have two years to get a transaction done or they must return the money. At the end of the transaction, they merge with a target company which is now publicly traded.
While negotiating, the SPAC will look for a period of exclusivity where the target company gives up its right to work with another SPAC, go through an IPO or be acquired. The SPAC on the other hand, will likely not want to offer a period of exclusivity as it has a short amount of time to get a deal done before money gets returned to investors.
Signing an exclusivity agreement limits a target company’s options but it may feel it has no choice.
If success truly is 90% preparation and 10% perspiration as they say, a good way to handle the recently popular SPAC opportunity is to run a process through a registered representative ahead of time and knock on SPAC doors before they knock on yours.
If your company is in a hot space, has growing or recurring revenue and is of a certain size, it is very likely it will be contacted. Consider, according to CNBC, just in 2020 alone, 194 SPAC IPOs raised $67 billion!
Much of this money is kept in a trust until a transaction happens or it is returned to investors and it represents a portion of money that target companies receive when they merge with a SPAC. A SPAC is not limited to merging with a company that is worth as much as it has in its trust. It uses the money in the trust to buy shares of the target company but the target can be worth far more than the SPAC has raised.
This is why target companies often simultaneously raise additional private money via institutional investments. This is known as a private investment in public equity or a PIPE transaction. There could be a separate debt or equity offering as well. Often, a company will announce a PIPE and SPAC transaction together.
As an example of a recent transaction, Crypto exchange Bakkt announced it would go public via a SPAC merger, giving it an enterprise value of $2.1 billion.
There are many pros to a SPAC transaction in my opinion:
- It can take place in as little as three months but usually five or more.
- Companies can retain tax net operating losses or NOLs.
- There is less time and expense than with filing a registration statement for an IPO.
- Since the transaction happens so quickly, there is a good sense of how the market will accept the newly public company’s shares.
Notice, three of the positives of a SPAC merger are the speed of the transaction. Ironically, speed – the elimination of a long IPO process, is a big part of why a SPAC may not be a fit for every organization. Here are some of the cons in my opinion:
- You must quickly act like a public company.
- You must perform timely filings.
- Your corporate governance infrastructure must be in place and working well.
- Comp plans need to be in place.
- Earnings forecasts must be accurately calculated.
- You must develop relationships with and know how to speak with analysts.
- You need to comply with Sarbanes-Oxley regulations.
- This includes Section 302 and 906 certifications
- Required preparation of PCAOB financial statements.
- You need the infrastructure to handle the preparation of and time to allow auditors to see your Qs and Ks and then there must be time to report them.
- You must have a board and management in place to handle this enhanced financial reporting.
- You must run your business, hitting targets while dealing with M&A documents, PIPE documents, due diligence requests, SEC filings and retraining your team to work in a publicly traded environment.
- You must ensure you hit your numbers – seemingly ignoring the above distractions.
In summary – many companies choose the SPAC route, trading a higher level of market certainty for what seems like an impossible task of running a business while doing much the same amount of work of an IPO – perhaps more, but in a few months.
How does the SPAC merger process work?
- You negotiate and sign a letter of intent or LOI.
- You agree on an equity valuation.
- More intense due diligence begins.
- You begin outreach for private placement funding.
- You negotiate the transaction agreements for the merger – to go public.
- You begin preparing for public readiness.
- You work on the SEC filings for the deal.
- Ideally, you announce the merger and PIPE together.
- You focus on SEC filings and responses.
- Shareholders vote to approve the transaction.
- You produce myriad public company statements and filings.
If you aren’t prepared for dealing with SPACs before they come knocking, you will have a short window in which to make a very important decision. They will likely want one or more board seats as well so you want to be sure to find the right partner before doing a deal. In addition, you will likely be negotiating with a single party – which often means you don’t have the chance to compare your options in an auction-type environment.
SPACs have limited time on their side. They have to move fast. They try to lock your organization up for a long period while you negotiate. This is not in the interest of the target company.
In some ways, merging with a SPAC without investigating the market as a whole, is similar to negotiating with a random buyer who wants to purchase your house. Most people opt to hire a realtor because they gain access to a far larger pool of buyers and also benefit from a third-party negotiating for them.
Similarly, a knowledgeable registered representative working with an experienced firm can assist in exploring your alternatives – not just SPACs but IPOs, debt, etc. If you choose an independent representative that doesn’t underwrite IPOs themselves, you can get a more objective opinion. Another consideration is some of the major investment banks may favor their own offerings or those of their colleagues at other firms, meaning your company may not get truly objective advice.
Rich Tehrani is CEO of RT Advisors and a Registered Representative with and offering securities through Four Points Capital Partners LLC (Four Points) (Member FINRA/SIPC). RT Advisors is not owned by Four Points.
The above should not be considered and is not a recommendation to invest in or sell short the securities of the underlying company(ies).