While SPACs have existed since the 1990s, participants in the M&A markets have been hearing more about them lately. SPACs are discussed daily in every form of business media and are becoming a regular conversation topic in boardrooms of companies considering their exit alternatives.
Obviously, increased SPAC activity is an important driver of all this talk. SPACs completed 117 IPOs in the fourth quarter of 2020, up 56% quarter over quarter. The total value raised during 2020 was more than $76 billion. And there were almost as many SPAC IPOs in the first quarter of 2021 as there were in all of 2020.1
However, even with this high level of SPAC IPO activity, recent media coverage of SPACs and shifting investor undercurrents have highlighted the potential risks. This has driven calls for greater regulation and warnings of a “SPAC bubble.” Going forward, greater SEC-level regulatory scrutiny could focus on topics such as SPAC investor disclosures, due diligence, and others.
Clearly, the jury is still out on the SPAC trend’s longevity and on how these SPACs will perform in the market over time. For certain companies, however, the SPAC path can be very compelling and a viable exit path. The hundreds of SPACs that have been raised have a mandate to search for suitable investments, and for some companies, this can be an attractive way to go public.
For the past several years, Harris Williams has helped clients understand the merits of selling to a SPAC, which SPAC partners are right for them, and the importance of designing the right SPAC process. We regularly incorporate conversations with SPACs into our client engagements, and we have executed several successful SPAC transactions for clients. Some of those transactions have only involved SPACs, while others have included multiple paths for the shareholders and management teams.
Below, our senior bankers draw from these transactions to clarify when and how to work with this increasingly prevalent buyer type.
The Right Path?
There are many factors that influence whether selling to a SPAC is an appropriate path. The following considerations may vary depending on industry, company, and goals, but are generally applicable to most businesses:
- Going public is an attractive outcome to shareholders and the management team
- The company has an attractive forward earnings profile and growth story, and a SPAC can support that growth with the most cost-effective capital
- Public comparables are trading at a premium to the expected M&A multiple, which will enable the SPAC to bid aggressively while preserving value for its investors
- The SPAC option provides a better long-term path to liquidity than other strategies
John Neuner, co-head of M&A at Harris Williams, reiterates the importance of carefully weighing these factors: “Every client we interact with has different needs. We listen, get to know them and their goals, and help them choose the right strategy. For some that want to go public, a SPAC could be a great option.”
Neuner adds that SPAC-ready companies should have a management team that wants to be public and a long-term growth curve that will benefit from participation in public markets, which often trade at higher valuations. He stresses the importance of thinking well past the transaction itself and confirming that this is the right decision for the company over the next three to five years.
Chris Rogers, a managing director in the Aerospace, Defense & Government Services Group, points out the fundamental importance of vetting the SPAC option carefully. “A SPAC process begins identically to a traditional M&A transaction,” he says. “We start by understanding the business, the market, and the goals of the management team, and thinking through the full range of alternatives. We prep the team for the sale process and help them craft a compelling story. The divergence between a SPAC and M&A process begins in the timing and nuances of discussing the company with new potential partners.”
As Rogers explains, SPACs can be an important source of liquidity for certain sectors with strong projected growth. “We’ve seen several space and urban air mobility platforms that have been purchased by SPACs,” he says. “These otherwise would have been thought of as later-stage venture deals, but SPACs have allowed the public markets to access them. Ultimately that’s good for broader urban air mobility efforts, because access to capital was a potential roadblock for them.”
If a seller thinks a SPAC could be a good fit, they should weigh the following considerations:
- They will receive proceeds in the form of shares, not cash. The average seller to a SPAC gets less than 20% in cash, and they typically cannot sell their shares for six months or longer.2 Recent market issues have decreased the cash available and increased wait times.
- There are some risks involved with the closing process, most notably raising the PIPE (private investment in public equity), shareholder redemptions, and the final shareholder vote to approve the merger. Once again, recent shifts in the market have notably increased these risks and the time required for closing, during which the seller is committed to the transaction.
- Going public entails a new regulatory framework (including compliance with the Public Company Accounting Oversight Board [PCAOB]), the need for an investor relations function, and responsiveness to shareholder demands and expectations.
Again, these are only some of the concepts to weigh when considering the SPAC option. If all of the factors and considerations we’ve listed here are aligned with a company’s goals, working with a SPAC likely merits additional investigation.
Optimizing the Outcome with a SPAC Buyer
Just as with private equity groups, family offices, patient capital investors, and strategic buyers, SPACs come in many different shapes and sizes. In Harris Williams’ experience, determining the fit between a client and a potential SPAC buyer comes down to five key factors.
Five Key Factors to Evaluate SPAC Buyers
1. SPAC Mgmt. and Board Track Record
The first is the SPAC’s management and board: Significant experience in the company’s industry and a successful track record with similar SPAC transactions will bolster investor confidence.
“When choosing among SPAC buyers, sellers need to assess their ability to get a deal done, and understand their board of directors and their expertise,” says Neuner. “It’s critical to make sure the SPAC really knows their industry and business.”
Harris Williams approaches this challenge through intensive SPAC Workshops, in which we assess all the potential SPAC buyers and their fit with our client’s goals. We also collaborate with the SPAC to develop a compelling equity story.
When running a SPAC-Off, the process is more of a two-way dialogue than a sale mandate, says Drew Spitzer, a managing director in the Energy, Power & Infrastructure Group. “Selling to a PEG or a strategic buyer often involves early looks and fireside chats, all with the goal of enticing potential buyers to pursue the opportunity,” he says. “In contrast, during our SPAC Workshops we’ll carefully analyze the SPAC’s board of directors, its acquisition strategy and track record, and, overall, its fit as a long-term partner in a public company. If there is the right fit, the conversation quickly changes to selling the story to the public markets.”
2. Fit with SPAC's Investment Mandate
Second, and closely related, is the fit between the company and the SPAC’s stated investment mandate and industry expertise, the quality of which is essential to the deal’s credibility in the market. Close alignment on mandate also helps ensure commitment throughout the transaction.
“As an example, the SPAC to which we sold Atlas was a really good fit,” says Matt White, a managing director in the Harris Williams Energy, Power, & Infrastructure Group. “Atlas was exactly what the SPAC was looking for. The SPAC included an executive who was the former COO of a comparable business. Most importantly, the SPAC had determined that Atlas was essential to its investment thesis.”
White adds that with so many SPACs currently in the market and even more added in the last quarter, knowing their investment mandate and industry expertise is critical. “It’s not just knowing the SPACs’ interests on paper, but also having relationships with them in transaction settings. Harris Williams has benefited from the fact that so many SPACs are backed by PEGs or operating executives whom we have worked with before. That helps us assess whether the SPAC would be a valuable partner to the company.”
3. SPAC's Flexibility on Deal Terms
Flexibility on deal terms is a third important factor. A successful SPAC team will generally be willing to be flexible on deal terms. Items such as reverse exclusivity, seller rollovers, and reduced dilution to boost value for sellers should all be on the table in competitive situations.
Rogers says the best way to create deal term flexibility is by talking to a handful of logical SPACs in a SPAC-Off process. While there will be similarities between their offers, there are also various “bells and whistles” that may be more compelling to the company. “For example, we recently saw a company choose a partner based on flexibility toward cash-outs for certain shareholders,” he says.
“Once a company is selecting a party to move forward with, they’re generally asking them for mutual exclusivity,” says Spitzer. “They don’t want the SPAC to be out looking at other deals, and vice-versa. That’s another reason the upfront vetting is so crucial, and why flexibility can be the deciding factor.”
4. Sponsor Support for SPAC's Transaction
The ability and willingness of the SPAC sponsor to backstop the deal can be a key differentiator and should be a critical focus of the process, particularly given the risks associated with shareholder redemption and private investment in public equity (PIPE) execution at close. SPACs have varying degrees of support behind them, which can be a critical success factor.
“Sellers should know who is backstopping the PIPE, and whether it’s underwritten, so that they’ll have guaranteed capital support when the deal has to get done,” says Spitzer.
White agrees: “We’ve worked with SPACs backed by major private equity groups, and they’ve had additional cash available in case there was an issue getting the PIPE in place, or if shareholder redemptions were high. Having that commitment for at least one piece of the puzzle is a big help.”
5. Time Left Until SPAC Liquidation
The fifth factor is timing. SPACs typically have 24 months following the initial public offering to close an acquisition, after which all cash is returned to stakeholders. Accordingly, there’s a “sweet spot” at which the SPAC has both urgency to complete a deal and enough time to do so.
“Those last six months can become a bit of a ‘desperation window,’” says White. “Institutional investors might look at the transaction with more scrutiny, and potentially pull out of it.”
Conversely, says White, the prior six months, or first half of the second year, can be an optimal period. “They’ve raised all the capital, they’ve closed the SPAC, and now they’ve vetted enough opportunities to have credibility with their investors.”
As such, in addition to tracking the boards, industry focus, and backing of the hundreds of different SPACs, Harris Williams tracks the time windows of SPACs. “While we have seen SPACs be very aggressive in their time window when it is the right fit, we have also seen them pass on deals at the tail end of the time window,” notes Spitzer.
Conclusion
“Company owners should remember that selling to a SPAC versus selling to private equity or to a strategic buyer is really apples and oranges,” concludes Neuner. “But if going public fits the company’s long-term goals, it can be a good strategy.”
As Neuner and his colleagues make clear, not all SPACs are created equal. A proven track record in a given industry, differentiated theses, flexibility on terms, solid financial footing, and being in the sweet spot of their search for an investment all raise the odds for success. And, as with any growth strategy, selling to a SPAC should be undertaken only when it aligns with a company’s most fundamental goals.
To learn more, please contact our senior bankers.
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