For many executives, going public signals to the world that your business has grown and is now ready for the bright lights of a national exchange. Ironically, the largest obstacle to achieving this objective can be the IPO process itself – time, expense, market conditions, and global events can often combine to discourage even the most promising candidates from pursuing a public listing via the traditional route. COVID-19 has added new layers of uncertainty to the capital raising conversation, including impacting private company valuations and driving unprecedented market volatility. Notably, an alternative method of becoming public is increasingly available to private companies: Special Purpose Acquisition Companies, or SPACs.
Simply put, a SPAC is a publicly traded shell company sponsored by experienced investment professionals and/or industry executives. With no operations of its own, yet flush with cash from its IPO, the SPAC team spends up to 24 months (unless extended) searching for an attractive merger opportunity, often in a pre-defined industry vertical or geographic region. Once a definitive merger agreement is signed, the SPAC team presents the opportunity to the SPAC investors, who then choose to stay in the deal and remain shareholders of the merged public entity, or redeem their shares in the SPAC (plus interest) and leave the deal. The SPAC structure of shares and warrants also provides arbitrage opportunities for investors.
Now in their third decade of existence, SPACs have experienced highs and lows. In the early 1990s, they became known for helping smaller, not quite ready for prime-time companies go public while offering outsized favorable terms to their sponsors. Not surprisingly, this produced a track record of poor performance which led to a period of stunted growth and reputational damage. The adoption of regulatory changes drove the evolution of the SPAC structure and in the early 2000s a new generation of SPACs was launched that created a more attractive and sustainable investment vehicle.
In 2009, after a fall-off during the financial crisis, there was a single $36 million SPAC IPO. Last year, 59 SPAC IPOs raised $13.6 billion. Thus far in 2020, 45 SPACs have gone public raising $14.0 billion, according to SPACInsider. SPACs achieved a new milestone this year when Therapeutics Acquisition Corp. completed its IPO by selling common shares rather than units – a first for a SPAC and an indication that demand in the space is rising. Hedge-fund billionaire Bill Ackman’s Pershing Square Tontine Holdings is set to become the largest SPAC in history when it begins trading this month with a targeted IPO of $4 billion. This record pace has been achieved not in spite of the consequences of COVID-19, but very likely because of it. A recent piece in The Wall Street Journal contends that fallout from COVID-19 has put many businesses under stress thus creating a target-rich environment for SPAC sponsors and a quicker, more reliable route to the public markets for businesses that are ready to take the next step.
Today, SPACs are characterized by higher quality companies, seasoned management teams, and higher profile sponsors that include private equity firms and traditional investment banks. Some of these sponsors have come back to the market multiple times with new SPAC transactions. In 2020 alone, companies including DraftKings, Virgin Galactic, Immunovant, and Repay Holdings, have utilized the SPAC process to come public.
The De-SPACing Process
The “de-SPACing” process – the typically several-month period leading up to the completion of the business combination – commences on the day the SPAC publicly announces the acquisition target. Management should use this time to deploy a comprehensive investor communications and outreach strategy to help consummate the transaction. This includes creating impactful investor presentations, building out the corporate website, meeting with appropriate investors, participating in relevant investor conferences, and regularly announcing business developments. It is also vital to prepare for life as a public company, post-merger.
Key initiatives during the de-SPACing process include:
Messaging: SPAC investors are looking to lock in an attractive valuation with the expectation that their investment will grow over time. SPACs must articulate a clear and defensible value proposition supported by appropriate financial metrics, and with a focus on long-term growth opportunities.
Focus on fundamental sector-focused investors: A portion of the SPAC holders will choose to redeem. Given their inherent industry knowledge, fundamental sector-focused investors offer the greatest opportunity to fill this void and replace redeeming funds.
Analyst outreach: In those instances where SPAC underwriters are not traditional investment banks, the newly public merged company will emerge from the process with no analyst coverage. Companies should make it a point to arrange meetings with equity research analysts during the de-SPACing process to introduce the story, generate conference invitations, and plant the seeds for research coverage.
Media: SPACs should target local, national, industry, and transactional media during the de-SPACing process. Don’t ignore the power of a high-profile SPAC sponsor – an accomplished investment professional or industry executive can attract attention to the transaction by virtue of their prior successes.
Plan for public company life: Companies must prepare for life after the SPAC process to ensure that the necessary processes, procedures, and plans are in place to survive and thrive as a newly public company. This includes everything from choosing and engaging consultants and suppliers to educating executives and employees on the stringent public company disclosure rules to developing a post-merger Investor Relations Plan.
So, are SPACs here to stay? In our view, yes – especially in the era of COVID-19. Although IPO and secondary offering activity is recovering (three of our clients recently completed offerings), the uncertainty created by converging economic and social events may elevate the advantages of SPACs to companies considering accessing the public markets, namely: reduced time, expense, and uncertainty, as well as the participation of higher quality investors and an improving record of success.
If you have any questions or want to learn more about The Equity Group’s approach to pre- and post-merger SPAC IR, reach out to me anytime.