SPACs: A hot topic for investors, acquirers and sellers
SPACs raised a record $76.2 billion in 2020, up 557 percent from 2019, and SPAC stocks have delivered average annualized returns of about 17.5 percent since 20151. The explosive growth in these “blank check” entities—which exist solely to acquire other companies—has provided another option for sellers, as well as an efficient way for private companies to tap public equity markets.
SPAC mergers aren’t simple, however, 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 requires a gaggle of complex challenges: vetting of potential SPAC suitors, tax structuring, public company readiness, sophisticated business forecasting and, often, systems upgrades. The more a company peels away at a SPAC merger, the more it’s likely to find “unknown unknowns.” This complexity is why KPMG has created the SPAC Intel Hub.
Whether you’re a privately held firm that wants to consider a sale to a SPAC or an investor in a SPAC, you’ll find the KPMG SPAC Intel Hub a valuable resource that you will want to visit often. Over the coming weeks, we will be adding a series of easily digestible content on various issues that arise during a SPAC deal cycle, as well as our definitive SPAC Handbook.
The KPMG SPAC Intel Hub
Here, we provide a single portal to our constantly updated SPACs knowledge. Here, you will find concise answers to the questions that we get asked most frequently—and ones we think you should be asking.
The SPAC transaction lifecycle
Key pre-deal activities
Explore liquidity options
A private company can go public via an initial public offering, a direct listing or a SPAC merger. It should weigh the pros and cons of each option before making a choice.
Perform due diligence on SPACs
A private company considering a merger with a SPAC should thoroughly probe the potential partner’s reputation, experience, ability to raise additional funds, etc.
Negotiate contingent considerations
During the examination of a SPAC partner, consider its willingness to accept lower equity in the combined company and less dilutive warrant coverage in exchange for a lower upfront payment and future payments upon achievement of specific targets. Also discuss the SPAC’s willingness to compensate the target company’s expenses if SPAC shareholders fail to approve the merger.
Elect tax structure
Choose an optimal legal entity structure from a tax perspective. This will largely depend on whether the target of a SPAC is a standalone C corporation or a partnership.
A SPAC may arrange debt financing to acquire a target much larger than funds raised from its IPO or to cover for the gap in capital when original SPAC investors redeem their shares.
A SPAC may also arrange private investment in public equity, or PIPE, from institutional investors to acquire a target much larger than funds raised from its IPO or to cover for the gap in capital when original SPAC investors redeem their shares.
Prepare marketing roadshow
Typically, it is the responsibility of a SPAC to undertake roadshows to market the deal and find debt and PIPE financing, but a target company can also participate.
Compile Proxy / S4
The proxy and/or a registration statement, such as Form S-4, is filed with the SEC when the merger is announced and must contain key disclosures, such as the target company’s historical audited financial statements and MD&A, and the combined company’s pro forma financial information.
Assess public company readiness
Identify gaps in the target’s current ability to go public and operate as a public company and develop a readiness plan to address them. Gaps typically include tax structure and reporting, accounting records to report, SEC reporting, systems and processes, internal controls, investor relations, human resources and executive compensation.
Key pre-close activities
Complete Proxy / S4 and address SEC comments
The SEC will review the proxy and registration statement before the shareholders’ vote to approve the SPAC’s acquisition. The initial round typically takes 20-30 days, and it may take 2-3 rounds to clear SEC comments.
Compile Super 8-K
The financial information required includes the combined company’s pro forma statements and the target’s historical financial statements. The pro forma financial statements should reflect the actual fund flow of the merger, and the periods presented may need to be updated based on SEC reporting timeline.
Execute public company readiness plan
Implement the public company readiness plan to address gaps identified in the readiness assessment. Tasks may include optimizing tax structure, establishing an audit committee as well as SEC reporting and investor relation teams, upgrading IT systems, streamlining processes and shortening the month-end close timeline, and documenting and implementing controls.
Key post-close activities
File Super 8-K
After the consummation of the merger, the combined company must file a Form 8-K within four business days.
Implement ongoing public company operations
File SEC-required documents, such as Forms 10-K, 10-Q and 8-K, on a timely basis. Provide quarterly CEO & CFO certifications for SOX requirements. Conduct quarterly earnings calls and Q&A sessions with investors and analysts.
Explore strategies for growth
Maximize shareholders’ value with plans for performance improvement, short- and long-term strategy development, and portfolio assessments to identify potential divestitures of non-core assets and/or acquisitions of value-added businesses.
Across the phases, KPMG can provide cross-functional support for tax, diligence, accounting, modeling, IT systems and SOX.
Steps to ensure a successful SPAC merger
In this video, we share 7 key tips to keep in mind as well as a case study that demonstrates one of the most common pitfalls.