SPAC Mergers: Navigating the Latest Trend in the Capital Markets
Companies are increasingly turning to special purpose acquisition companies, commonly known as SPACs, as an attractive alternative to access capital markets. While this path is not new, its popularity has recently been skyrocketing. In fact, in 2018, SPACs had their best year ever in terms of deal value and their highest volume since 2007, with 46 initial public offerings (IPOs) raising nearly $10 billion. The number of SPACs continued to rise last year, jumping from 4% of the total share of annual IPOs in 2013 to 30% in 2019. Historically, these transactions were viewed by many as risky since they often involved dormant shell entities with unknown or undisclosed issues. However, the recent popularity of newly-formed active SPAC mergers has reduced the perceived risk profile for these transactions and made them more inviting. But as with any new trend, companies need to be aware of the complexities and potential pitfalls before jumping on board.
A SPAC uses capital raised from investors to legally acquire an existing privately-held company (Opco). While certain aspects of a SPAC merger may vary, many of the fundamental processes are similar to a traditional IPO. Unlike a traditional IPO, however, this approach includes several appealing options, including eliminating the need to market the Opco on the back-end of the IPO process. In a traditional IPO, underwriters market and sell the company’s story. In a SPAC merger, original SPAC investors vote on the transaction.
SPAC mergers are complex transactions, achieved only through expert preparedness and with the support of robust and experienced teams. Acting too quickly, or without the right resources, can put the transaction as a whole at risk. Both before and after the merger, companies need to be mindful of the many complexities that differentiate a SPAC from a traditional IPO and how to avoid the common pitfalls, thus achieving a more efficient and effective transaction.
Before the Merger
- Timeline: Many SPACs have a set period (typically 18 or 24 months) to complete a merger or the original SPAC investors can redeem their investment. Members of the SPAC management teams may view the SPAC window differently, some moving too quickly and some too slowly. Ultimately, the Opco’s readiness and preparedness drives the overall timeline, rather than the desires of the SPAC.
- Diligence: In any market transaction, capital flows to the best perceived opportunities for return relative to the risk. Several SPAC mergers have failed because sponsors rushed to seal a deal rather than understanding its marketability and associated risks. In a traditional IPO, marketability is evidenced in “testing the waters” and then on the IPO roadshow with underwriters and their syndication, while in a SPAC it is evidenced at the shareholder vote.
- Resources: Sponsors and management teams must find the right balance of internal and external resources to adhere to required timelines while meeting compliance and financial reporting obligations.
- Financial reporting compliance: SPAC mergers often have more onerous and complex financial reporting obligations during the SEC review process. For example, identifying the accounting acquirer based on generally accepted accounting principles (GAAP) is typically not straightforward in SPAC mergers. This can have a significant impact on determining the basis of financial statement presentation and which company’s financial statements, if either, are stepped up to fair value at the date of the merger. These issues can impede progress on the transaction and create tension among the working group.
- Recent or contemplated acquisitions: Significant acquisitions and the related financial reporting requirements and AICPA audits are frequent and time-consuming in SPAC mergers. SEC rules in this area may be changing in the near future, which could have a further impact.
- Disclosures and controls: The Opco’s historical audited and credited financial statements may need to be “upgraded” from GAAP to S-X compliance and the audit basis from AICPA to PCAOB standards. Both of these “upgrades” can be time-consuming and have an impact on the overall timeline as well as many other disclosures in the process. Riveron has seen clients experience months of delays due to this unpreparedness.
Close of and After the Merger
- Merger shareholder vote: A key component of the SPAC process is the merger shareholder vote, which can make or break the deal. Competent marketing of the Opco to the SPAC’s shareholders, preparing adequately detailed and timely information for the vote, and being aware of any ramifications of redemptions by SPAC investors is crucial to ensuring the merger is approved.
- SEC filings: Filing Form 8-K and announcing the merger completion is required within four days of the merger’s close. Companies must also complete the immediately preceding pre-merger quarterly or annual financial statements and associated audits (to be included in a subsequent Form 8-K/A with “recast” financial statements for all relevant prior periods) as if the newly public combined company was always the SEC registrant. Secondly, filing the newly-public combined Form 10-Ks and 10-Qs going forward, including the relevant SOX 302 and 906 certifications, is critical with no acceptable delays allowed.
- New accounting standards: GAAP changes such as ASC 606 (new revenue recognition standard) and ASC 842 (leasing standard), must be assessed and implemented, where applicable.
- Sarbanes-Oxley: SOX 404(a) and 404(b) compliance planning is crucial as this could be accelerated for non-EGC companies. The Opco management teams should begin their risk assessment and design of internal control structure early on in the process.
- Organizational readiness: Companies will need to review the current state of the organizational structure and identify gaps and areas for improvement. These areas include IT upgrades or replacements, financial reporting close acceleration and related cross-functional reviews, change management capability, audit committee establishment, and reviewing the investor relations, treasury, and internal SEC legal functions. Additionally, management should continue to assess the financial effectiveness and operational efficiency of the newly combined public company.
Value creation and shareholder investment monetization must be the drivers for choosing a SPAC merger, as opposed to any perceived ease of financial reporting, legal, or marketing burdens. SPACs are not a quick fix for a company looking to go public. In many cases, the journey is more onerous and the perceived shortcuts are not shortcuts at all. Riveron has assisted Opco management teams, sponsors, and SPAC teams to execute these transactions before, during and after the merger from a diligence, technical accounting, SEC reporting and organization readiness perspective. We have seen what has worked well and what has not worked well. If a company is not ready for a public offering, then neither a traditional IPO nor merging with a SPAC is the right answer. For a company that is organizationally ready and has the right team around it, a SPAC merger can be an attractive alternative vehicle to access the capital markets.