Questions for the board with a SPAC in sight

Special-purpose acquisition companies (SPACs), also known as blank-check companies, are on pace for a record year. According to SPACInsider, SPACs raised $12.3 billion in capital in the first half of 2020—almost as much raised during all of 2019 ($13.6 billion). The summer of 2020 has also seen the largest announced acquisition and the largest initial public offering (IPO).

With nearly 100 SPACs currently searching for acquisitions while another handful are in registration, directors and management of private companies that may approach or be approached by a SPAC should be aware of the opportunities as well as the oversight-related challenges and trade-offs a transaction may present. 

Common targets for SPACs include companies currently held by private-equity funds, as well as corporate spin-offs, and occasionally family-owned firms with significant operations and professional financial reporting and internal controls.

“We are seeing sellers motivated by both liquidity and the opportunity to raise equity capital,” said Aamir Husain, partner, IPO Readiness, KPMG.“ But once a SPAC has found its target, closing the transaction takes significant effort. Nothing can slip through the cracks.” 

Following the IPO, SPACs generally have two years to complete the purchase of an operating company. Some SPACs are launched to focus on a specific industry, sector, or business trend, while others are truly blank checks. SPACs are typically raised by a financial sponsor who is incentivized to complete a transaction by holding deeply discounted founder shares that convert to roughly 20 percent of company equity following the completion of an acquisition.

For private-company owners looking to completely liquidate their positions, a SPAC is more complicated than a direct sale. However, for current owners looking for liquidity and the potential upside that an equity investment can bring, as well as the public market premium, a SPAC transaction may be beneficial. 

“A smooth process really depends on how ready the target company is for going public,” said Keyu Zhu, partner, Accounting Advisory Services, KPMG. 

Boards of directors of private companies entertaining a public offering through a SPAC should consider the following:

• Weighing a transaction. Has the company fully assessed the trade-offs in a transaction with a SPAC compared to a traditional IPO or sale to a private or public entity? What are the goals of the transaction? Is the board aligned with management on the strategic direction of the company? How might the strategy shift under new ownership and/or an infusion of equity capital? Is the company prepared for the scenario in which an announced transaction is not completed?

• Leadership insights. How experienced are the financial sponsors? Do they have a track record in completing a SPAC transaction and/or sector-specific expertise and operating partners? How will the public company board be established? Of the existing board and management, who is available and best suited to serve in that capacity for the public entity?

• Valuation and other matters. Does the board have a solid understanding of the company’s potential public market valuation? What external factors may impact that valuation and the company’s ability to consummate a SPAC transaction? Are there existing legal, regulatory, or compliance matters (e.g., conflicts of interest) that could impact the company’s ability to sell?

• Diligence and disclosure. Is the company prepared for the diligence process, including the availability of audited historical financial statements in line with public company expectations? Can the company make appropriate disclosures related to historical acquisitions that are material to the financial statements? Does the company have an appropriate internal control structure? If so, is the company prepared to document its internal controls in line with Sarbanes-Oxley reporting? 

• Public company reporting. How robust are the company’s processes for closing the books, budgeting, and forecasting? What would be required to ramp up to public company compliance, reporting, and disclosure—including steps to establish proper board governance, an investor relations team, and executive compensation plans?