Are You a SPAC-Ready CFO?

As a result of the soaring number of special purpose acquisition company (SPAC) IPOs in recent years, there are now roughly 600 companies eager to spend a collective $160 billion on M&A transactions, with about half of them facing a critical deal-making deadline.¹

SPACs are companies that have no commercial operations and are formed strictly to raise capital through an IPO for the purpose of acquiring or merging with an existing target company. Sponsors put the money raised through an IPO in a trust account while they hunt for targets to acquire. The clock is always ticking; if they fail to find a deal within a set time frame, ranging from 12-24 months, the SPAC faces liquidation. When that happens, proceeds are returned to investors, and the SPAC’s sponsors lose millions of dollars of at-risk capital they’ve invested to launch the SPAC. They also miss out on the rewards of finding a successful merger candidate and completing a deal, which triggers their payment in the form of a “promote” typically measured as 20% of the original SPAC IPO raise, plus warrants. In other words, SPAC sponsors have abundant incentives to identify high-quality targets and complete transactions within the time period.

The stampede to launch SPACs gained momentum in 2020, when the number of transactions rose 320% from the prior year to 248 SPAC entities garnering more than $83 billion in IPO proceeds. Last year, their ranks soared to 613, raising $162.5 billion in IPO proceeds. In both years, SPACs represented nearly half of all IPOs.² From a historical lens, SPACs remain very active, with 2022 likely ranking as their third highest year on record. However, just as traditional IPO activity has slowed, SPAC IPOs numbered 53 in the first quarter of this year, down from 298 in the same quarter last year.³

For target company CFOs, the abundance of SPACs now chasing acquisition candidates may present an appealing opportunity, especially given the volatile state of the equities market and economy overall. When they are acquired by a SPAC, target companies lock in their valuation at the start of the deal, negotiating an exact purchase price rather than waiting for the market to slap on a price tag. Once a SPAC identifies a target acquisition, its shareholders can vote to stay in the deal or redeem their shares. As recently as April, redemptions reached 78%, down from 85% in March, but still up sharply from the year-ago level of 17%.⁴ To cover the expenses of going public, SPACs also typically raise additional funding via a private investment in public equity (PIPE) transaction, which has become increasingly challenging in a crowded market.⁵

The combination of high redemption rates, along with insufficient backstop funding to execute the IPO, can turn a SPAC offering into a costly proposition in choppy markets.

Quality Control

For target companies being courted by SPACs, it’s critical for their CFOs to set parameters around any prospective deal. Are you more interested in getting the absolute highest valuation, or would you favor a SPAC that appears to be lower risk—from a capital perspective—and offers an acceptable valuation? Some CFOs may elect to meet only with SPAC teams that can guarantee an infusion of PIPE capital; others, aware of the rise in redemptions, may seek to negotiate a reduced sponsor promote based on the level of redemptions.

CFOs need to apply the same analysis as they would to any deal, making sure to grasp the underlying economics. It’s also important for target company CFOs to explore the backgrounds of the SPAC sponsors: their track record with SPACs, any conflicts of interest, and their access to additional capital and flexibility, if they need to change the deal structure to improve cost-efficiency for the target. What benefits do they offer in terms of industry experience and knowledge?

Expectations that a SPAC will be a faster, easier, and cheaper route to the capital markets than a traditional IPO may be misguided. A SPAC merger can be faster to determine pricing, but once a target company is identified, it faces regulatory scrutiny similar to other public offerings. The weeks after a target is identified require multiple workstreams, from negotiating a letter of intent, completing PIPE marketing, potentially changing the standard of your previous audit, negotiating a merger agreement, and preparing a proxy/S-4 document. This compressed timeline puts pressure on CFOs to improve financial reporting, technological infrastructure, and cybersecurity, among other areas. And regulatory scrutiny over SPACs is intensifying.⁶

Since a SPAC’s sponsors will be judging how ready a potential target is to go public, target company CFOs may want to prepare by addressing the following:

• How sophisticated are we at forecasting and FP&A? The same numbers in the projections that potential PIPE investors see—KPIs, five-year forecasts, and other numbers included as part of investor communications—will be scrutinized by potential investors on the day the SPAC merges with its target. Your performance as a public company will be measured against those original forecasts, which means they ought to be thorough and carefully constructed.
• How fast can we close our books? The goal should be to have them closed within at least ten days and financial statements prepared in 15 days. If the business has trouble completing this exercise, the issues may need to be traced to their source: Is the company divided into silos? Are operations and the accounting function in sync? Is this company appropriately accruing on estimates? Do you need new software or additional talent? The need to speed up the close, of course, should not endanger accuracy.
• How well do we communicate? By the time the de-SPAC takes place, the once-private target company needs to have a full investor relation function in place to talk to the investment community. But even before then, companies should make decisions about communication practices. Do you want to focus on net income, EBITDA, or other non-GAAP results? What profit measures should you use in the forecasts you share?

For private companies in fiercely contested markets, a SPAC IPO could payoff by enabling them to make multiple acquisitions, thereby leapfrogging competitors.

—by Will Braeutigam, partner, Deloitte & Touche LLP, National SPAC Execution Services leader

End notes

¹ Boardroom Alpha, May 2, 202SPAC Market Review – April 2022,” Boardroom Alpha, May 2, 2020.
² “US De-SPAC & SPAC data & statistics roundup,” White & Case, first-quarter 2022.
³ Ibid.
⁴ “SPAC Market Review – April 2022,” Boardroom Alpha, May 2, 2022.
⁵ “SPAC financing gets more creative amidst clogged PIPE market,” Boardroom Alpha, March 14, 2022
⁶ “U.S. SEC proposes boosting blank-check company disclosures, liability,” Reuters, March 30, 2022.

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