Are you ready to be acquired by a SPAC?

By: David Oberst, Jeff Bergner, and Mike Dziczkowski

Amid many twists and turns in the capital markets in 2020, one of the more significant developments has to be the emergence of special purpose acquisition companies (SPACs). While the SPAC structure has been around for years, the current boom is unprecedented, opening up an important new route for private companies seeking access to the public markets.

Now into the second month of the year, 90 SPACs have completed share offerings, raising money that they hold in trust in a publicly-traded shell company while they shop for a business to acquire. This is following 2020, with 248 SPACs completing share offerings. That’s nearly quadruple the number of SPACs created in 2019, and larger amounts are being raised per deal, on average. Altogether, these so-called blank check companies now have more than $92 billion in equity waiting to be deployed. Typically, a SPAC has just two years to find the right company to buy, so expect to see more and more acquisitions get announced.

Attractive option

For a privately-held enterprise, there are a number of reasons why going public through a merger with a SPAC might be attractive. The process will typically be faster than an initial public offering (IPO), eliminating the parts where the company has to market itself first to bankers and then to potential investors. With a SPAC, a private company goes public all in one step through the purchase agreement.

A deal with a SPAC also provides greater certainty about pricing as compared to an IPO process, which comes with the ever-present possibility that market conditions will shift before the share sale gets done, cutting the amount of capital that can be raised or scuttling the deal. Another benefit of a SPAC transaction is quicker access to cash for owners or investors in a company, since the share lockups of an IPO don’t apply.

At the same time, though, a potential SPAC acquisition can come with risks. One of the key questions for a company that could be a candidate a SPAC deal is whether it is ready to be public. The IPO process has always been, in part, about preparing an organization for the rigors of being publicly traded—its ability to produce financial information to meet regulatory requirements, for example, and its preparation to communicate clearly with investors.

Financial readiness

Doing a deal with a SPAC isn’t like being acquired by a strategic buyer. The SPAC, as a shell company, has no operational capabilities. Your company will not be assimilated into a larger organization—you will become the publicly-traded entity. When the SPAC transaction closes, it’s like someone has flipped a switch: You’re a public entity now and need to operate like one. Some companies just aren’t ready for that.

Our advice to companies that might attract the interest of a SPAC? Approach this possibility as if you are going through an IPO on your own—and move with urgency. You will need to upgrade your audit opinion to meet the standards of the Public Company Accounting Oversight Board (PCAOB). This can take two to three months and may be required for each of the last three fiscal years.

The basis of your financials may need to be upgraded. Private companies can amortize goodwill, for example, but public companies cannot; so there may be a need to go back and do impairment tests. If you’ve done any acquisitions recently, you may need get audited financials for purchased companies. Additionally, when you file your first 10Q financial report, your CEO and CFO will have to certify the accuracy of the results under the 2002 Sarbanes-Oxley Act, a process that can be stressful without the proper control environment in place.

Telling the story

Beyond audited financial results, the filings required of public companies include elements you’ve probably never given much thought. What will go into your management’s discussion and analysis? What key performance indicators and non-GAAP measures will you want to report? More generally, there’s a need to think through how you intend to explain your business to investors.

We find that a lot of private companies are great at selling their products and may be really good at selling the vision or dream for the company. But when you suddenly become a public company, there are new governance restrictions on how you tell your story and probably a new mindset that’s required to communicate your message to analysts clearly. The shortened timeline for a SPAC transaction, versus an IPO, leaves less opportunity for the leadership of a company to learn these differences and to drive that learning down into the organization so that everyone understands that they no longer work for a private company.

There’s more to say about how a private company might prepare for a SPAC transaction. As a closing point, though, it’s worth keeping in mind that such a deal can happen surprisingly fast—not least because you may be courted by a SPAC that is nearing the end of the period in which it needs to get a deal done or return funds to its investors. Speed is one of advantages of working with a SPAC to go public, but it means that private companies should be thinking ahead, anticipating the possibility. Even when a company that’s for sale expects that a larger competitor will be its most likely suitor, that company could find itself being pursued by a SPAC. As we pointed out up top, there are a lot of SPACs shopping for companies right now. 

This posting contains general information only, does not constitute professional advice or services, and should not be used as a basis for any decision or action that may affect your business. Deloitte shall not be responsible for any loss sustained by any person who relies on this posting.