Insight

SPACs 2020: more money, bigger deals

What you need to know when working with sizzling-hot special-purpose acquisition companies

James Brannan

James Brannan

Advisory Managing Director, Financial Due Diligence, KPMG US

+1 212-954-1987

Keyu Zhu

Keyu Zhu

Partner, Advisory, Accounting Advisory Services, KPMG US

+1 212-872-4422

Patrick Brennan

Patrick Brennan

Managing Director, KPMG US

+1 617-894-3256

This is the year of the SPAC. Coming off a record 2019, fund raising more than doubled by the summer of 2020. From January 1 to August 2020, SPACs raised $28.5 billion in 75 IPOs. And these “blank-check companies,” which exist solely to take private firms public, are not only raising higher amounts but also going after larger deals. But make no mistake: SPAC transactions are not so simple.

SPACs are being used to take public everything from tech startups to a space tourism company. In October 2019, Richard Branson took his Virgin Galactic Holdings public through a $1.5 billion merger with a SPAC, Social Capital Hedosophia Holdings. In July 2020, Bill Ackman’s Pershing Square Tontine Holdings became the largest SPAC on record when it listed on the New York Stock Exchange and raised $4 billion, earmarked for “large capitalization, high-quality, growth companies.” The same month, a SPAC run by top former Citigroup dealmaker Michael Klein completed the biggest SPAC merger ever: Churchill Capital Corp. III’s $11 billion takeover of MultiPlan, a healthcare service provider.

The surging interest in SPACs today is driven by the relatively easy path to becoming a public company they provide compared with the traditional IPO. “The boom in SPACs is taking place at a time when trillions of dollars sit in private equity and venture capital funds and many promising companies feel less pressure to go through the costly and time-consuming process of listing on the stock market in order to raise new money,” wrote the Financial Times in a recent report.[1]

For sellers, a SPAC can provide a rapid and lucrative transaction. Sellers often get a significantly higher price than in an IPO (which might be intentionally underpriced to attract enough first–day buyers). What’s more, the selling companies’ management often remain in place and retain their positions. Also, as an alternative to a private-equity sale, a SPAC transaction has the advantage of lower debt. Last but not least, SPAC sponsors can become quality partners, who bring deal-making savvy, managerial knowhow, and a deep understanding of regulatory requirements for life as a public company.

It is important to keep in mind, however, that SPACs come with some unusual risks and require a great deal of extra preparatory work prior to a transaction:

  • Working with a SPAC means completing a deal within its allotted lifespan, typically 18-24 months. To expedite the transaction, the seller should prepare robust sell-side due diligence materials.
  • To facilitate the merger process, the seller must supply all information necessary for the Securities and Exchange Commission’s filing requirements, which often take extra time and effort in updating its historical financial statements.
  • To operate and report as a public company immediately after the merger, a private company must concurrently work toward readiness for public company regulatory compliance requirements, such as PCAOB[2] standard audit, and Sarbanes-Oxley (SOX) reporting on internal controls, corporate governance, and investor relationship and communications.

Learn more about the ins and outs of SPACs in the new KPMG report, 2020: Year of the SPAC.

Footnotes

  1. Financial Times, “Can SPACs shake off their bad reputation?,” August 12, 2020.
  2. Public Company Accounting Oversight Board.