What Are SPACs, and How Do They Work?
Special-purpose acquisition companies (SPACs) are shell companies that do not have the day-to-day operations of a typical organization. Instead, they are created solely to raise capital through an initial public offering (IPO), which they subsequently use to acquire or merge with another business or businesses. SPACs, also referred to as “blank check” companies, are traditionally formed by sophisticated investors — hedge funds, private equity firms, and serial entrepreneurs that are initially backed by larger institutional investors. The sponsors have expertise and experience in specific industries that generally inform the types of targets they’ll be pursuing.
When a SPAC is formed and completes its IPO, the capital raised is placed in a trust account that earns interest. The funds can only be used for an acquisition, but the SPAC may be able to use the interest for any working capital needs. While SPACs are not exactly novel — they’ve been around for decades — interest and awareness have been growing rapidly, both on the investor side and in companies who want to go public but do not necessarily want to follow the traditional IPO route.
Interest in SPACs is Growing, and For Good Reason
Throughout 2020, SPAC IPOs had exceeded 135 new listings, yielding over $50 billion in gross proceeds, as of the first week of October according to SPACInsider.com. One of the most notable SPACs was finalized in July, when Bill Ackman and Pershing Square raised $4 billion becoming the largest SPAC on record. The total proceeds, with two and half months still left in the year, has grown more than fourfold compared to 2019.
However, there are also a number of SPAC risks that must be taken into account, particularly for organizations interested in pursuing a merger with a blank-check company to access capital or go public. If your organization is considering selling to a SPAC, there are several considerations many companies tend to overlook, both before the deal is signed and after the acquisition is complete.
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3 SPAC Risks to Consider
Risk 1: There’s Still Ample Paperwork
Being acquired by or merging with a SPAC is a great opportunity if you’re looking for a strategic partner but don’t want to navigate the hassles and time commitments of a traditional IPO. That said, it’s important to understand that you’ll still have to file an S-4, which provides the details of a merger or acquisition, with the U.S. Securities and Exchange Commission (SEC). Many of the requirements are similar to a traditional IPO as well, such as filing an S-1 to register your securities with the SEC. If the necessary paperwork isn’t completed or is submitted incorrectly, companies can encounter regulatory snags that stall the deal and distract executives from key business initiatives.
Risk 2: The Accounting and Finance Gap
As an established company, you’ll already have built-out departments such as accounting and finance. However, because a SPAC is a shell company with no operations, it doesn’t have these teams in-house. Most, for instance, will tap third-party partners to manage these roles. Thus a gap can often exist between the capabilities of your organization and the SPAC. Moreover, your internal teams may not have the expertise needed to navigate the steps, the nuanced paperwork requirements, or other strategic considerations that are unique to being acquired by a SPAC. At WilliamsMarston, it’s been our experience that target companies often underestimate the technical accounting and finance functions required to navigate these transactions. And many can also be unprepared to navigate the rigorous due diligence process that again can distract executives from day-to-day operations while exposing the companies to unforeseen risks if they’re not thorough in their examination.
Risk 3: A Closed Deal Doesn’t Mean the Deal is Really Done
Depending on your company, there may be additional SPAC risks that emerge following a closed deal. For example, private equity-backed companies have unique considerations in the sense that a sale to SPAC won’t constitute a “complete” exit. This can create some nuance as GPs look to maximize their returns through secondary sales following the merger. A third-party can often play a valuable role to help both sides understand their options and optimize outcomes for all involved. Additionally, if the deal brings your company into new markets or requires other significant changes, improving processes will help you move forward efficiently and effectively, particularly at a time when formerly private companies adjust to the scrutiny that comes with public company disclosure requirements.
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3 Benefits of SPACs Versus More Traditional Avenues
Benefit 1: A Faster Process
It’s no secret that IPOs can take a while to complete. The average IPO takes four to six months if managed efficiently and properly. However, it can take up to a year or more depending on complexity and the review process. This is not the case with a merger into a SPAC, which typically takes three to four months or less. It’s for this reason that so many companies are choosing to go the SPAC route instead of traditional IPOs. Remember, speed is a benefit, but it’s also a risk — a shorter timeline toward the acquisition is great, but companies have to be prepared and have a plan in place for what happens next.
Benefit 2: A Timely Alternative
In addition to taking less time to go public, merging with a SPAC does not require a roadshow. This is because you don’t have to market yourself and gain investor interest. This is a very appealing option considering that travel, in-person meetings, events, and other gatherings are more regulated and can add new risks. As a result, being acquired by a SPAC is a calmer process — drawing less immediate and prolonged attention. And because there is no need for a roadshow, the SPAC can spend more time focusing on targets such as your company, providing greater focus and decreasing the time needed to gain access to the public markets.
Benefit 3: No Share Pricing and More Advantageous Outcomes
In a traditional IPO, a company’s shares must be priced or evaluated prior to making them available on the market. There are a number of factors involved in this, and it typically requires an investment bank to perform the research and initiate coverage. Additionally, once the SPAC does go public, your company (the target) can typically expect a more financially advantageous arrangement than a traditional IPO, given the compressed timeframe and reduced all-in costs of pursuing an IPO.
Reduce SPAC Risks and Improve Results with Proven Experts
WilliamsMarston is an accounting, tax and valuation advisory firm that partners with organizations considering options for their future. We assist in the IPO preparation process, provide technical accounting guidance, and offer numerous other services to ensure goals are reached quickly and efficiently. Our expert team also steps in to provide interim management support and process improvement to help companies achieve long-term success.
If you’ve been considering the advantages of merging with a SPAC or are looking for an expert partner to support you in the process, our team of consultants is available to assist.