The pros and cons of going public through a SPAC merger

Why so many companies are choosing to go public through a SPAC merger rather than an IPO

Dave Augustyn

Dave Augustyn

Partner, Accounting Advisory Services, KPMG US

+1 312-316-6157

Going public by merging with a special-purpose acquisition company (SPAC), rather than by launching a traditional IPO, is worth considering for an increasing number of private companies. All the SPACs courting targets at this time may make M&A seem even more enticing. But there are pros and cons to each option.

The latest analysis from the KPMG SPAC Intel Hub reveals that a private company may find certain advantages in a SPAC merger — such as speed and a guaranteed price — while outlining key challenges. Many private companies thinking of going public want to know if merging with a SPAC would be preferable to an IPO. The short answer: It depends.

In a traditional IPO, a private company issues new shares and, with the help of an underwriter, sells them on a public exchange. In a SPAC transaction, the private company becomes publicly traded by merging with an already-listed shell company — the SPAC.

“The momentum of the current market and the speed at which SPAC deals move are combining to present executives with a set of unique challenges that need to be navigated to successfully pull off a SPAC merger.” says Dave Augustyn, Chicago-based partner in Accounting Advisory Services at KPMG. “Going into the process with full awareness and being overprepared to address these challenges will better position the company to take advantage of the opportunities that a SPAC transaction provides.”

The main advantages of going public with a SPAC merger over an IPO

  • Faster execution than an IPO: A SPAC merger usually occurs in three to six months on average, while an IPO usually takes 12-18 months.
  • Upfront price discovery: Your IPO price depends on market conditions at the time of listing, whereas you negotiate the pricing with the SPAC before the transaction closes — which is much more advantageous in a volatile market.
  • Possibility of raising additional capital: SPAC sponsors will raise debt or PIPE (private investment in public equity) funding in addition to their original capital to not only fund the transaction but also to fuel growth for the combined company. This backstop debt and equity are intended to ensure a completed transaction even if some SPAC investors redeem their shares.
  • Lower costs of marketing: A SPAC merger doesn’t need to generate interest from investors in public exchanges with an extensive roadshow (although raising PIPE involves targeted roadshows).
  • Access to operational expertise: SPAC sponsors often are experienced financial and industrial professionals. They can tap into their network of contacts to offer management expertise or take on a role themselves on the board.


The main challenges of going public with a SPAC merger over an IPO

  • Shareholding dilution: SPAC sponsors usually own a 20% stake in the SPAC through founder shares or “promote,” as well as warrants to purchase more shares. SPAC sponsors also benefit from an earnout component, allowing them to receive more shares when the stock price achieves a specified target over a certain time frame which could lead to further dilution.
  • Capital shortfall from potential redemption: Initial SPAC investors may redeem their shares. If redemptions exceed expectations, then cash availability becomes uncertain and forces SPACs to raise PIPE financing to fill the resulting shortfall.
  • Compressed timeline for public company readiness: Although the SPAC sponsor may offer help during the merger process, the target company usually takes the brunt of preparing for required financials in the SEC filings and establishing public company functions, such as investor relations and internal controls, under a much shorter deadline than in an IPO.2.
  • Financial diligence performed at narrower scope: The SPAC process does not require the rigorous due diligence of a traditional IPO, which could lead to potential restatements, incorrectly valued businesses or even lawsuits.
  • Lack of underwriting and comfort letter: In a traditional IPO, the underwriter makes sure all regulatory requirements are met but because a SPAC is already public, the target company doesn’t have an underwriter.

For private companies interested in pursuing a SPAC merger, analysis of recently completed transactions may be helpful in gauging the prospects for their own deals in the future.

By revenue, most target companies fell under the $500 million range regardless of the industry. The three largest targets, all with revenue of more than $3 billion, were in 1) technology, media and telecom, 2) industrial manufacturing and 3) consumer, retail and travel. But the relatively modest revenue sizes indicate that many SPAC targets are valued for their future financial potential, not necessarily current revenues.

Not all SPACs target specific industries, but almost 80% do. Many are focused on technology, media and telecom (28.6%), and health care and life sciences (19.2%).

SPAC mergers aren’t simple and understanding all their intricacies can be daunting. Most importantly, a company going public via a SPAC must meet the same extensive regulatory requirements as those taking an IPO path — only in a matter of a few months, not the year or two that a typical IPO can take. Selling to a SPAC can offer a quick and lucrative transaction for unlisted sellers but it also requires navigating an intricate web of complex challenges.

To learn more, find the full report on the KPMG SPAC Intel Hub.

To learn more about how KPMG professionals in Chicago can assist your company visit the KPMG Resilience Series site for information on events, thought leadership, and local subject matter professionals.