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:
For more, read SPACS: A big deal again.