6 considerations before you take action
It’s no secret that SPACs are proliferating right now. These “special purpose acquisition companies” present an alternative to traditional IPOs, only with fewer regulations, a sped-up timeframe – the IPO process itself can take just a few months – and the potential for the SPACs sponsor and investors to reap significant profits early on. They also offer a way for target companies to get to market without the complexity of a regular IPO.
Briefly, a SPAC handles all the preparations for its IPO, including raising money from investors. Then it seeks a private company to merge with. In an indication of the structure’s popularity, SPACs raised nearly $26 billion in January 2021 alone, according to media sources. Everyone from sports legends to notable hedge fund managers have homed in on SPACs.
So what are the things you need to know before moving forward with an acquisition? Here are six considerations.
- Larger deal sizes, often characteristic of SPACs, widen the pool of potential acquisitions. Yet precisely because there are so many SPACs seeking a merger partner right now, the target may be able to shop around for better terms from investors, which could reduce the upside when a merger is announced.
- The heavy activity in SPACs may make investors more selective about SPACs they investigate.
- Companies seeking a SPAC may be drawn to the chance to be valued for future potential more than present-day profits. Targets in an early development stage, with lower revenue, have the potential for growth immediately.
- Target companies may want to mitigate potential roadblocks ahead of the due diligence process and consider standing up any tax reporting functionality, as SPACs deals can be tenuous.
- Although the SEC has not spoken out on additional regulations relating to SPAC transactions, that could change. Given the turnover in SEC staff and leadership, as well as the high amount of activity, the SEC could use regulations to curtail SPAC activity, for example, making it harder for SPACs to finalize acquisitions or ramping up the process around the comments for the S-4 proxy statement.
- Bear in mind that a sudden bear market could negatively affect SPACs activity altogether.