Special purpose acquisition companies, known as SPACs, have emerged as a popular way to access the public markets. They provide sponsors with an effective means to deploy capital and typically realize attractive returns. While the pace of new SPAC filings has slowed in recent months, many sponsors have jumped into the SPAC market. In fact, there is currently around US $180 billion of SPAC capital seeking merger partners, according to IHS Markit. This reflects a highly competitive environment in which success to a large degree will depend on the use of traditional deal-related strategies, such as a high-quality equity capital market story, partnership with respected public investors in public equity (PIPEs), and industry expertise in the target sectors.
Public-company readiness is also critically important for transaction success. Making the transition from a private to a public company is not an easy or straightforward process and must be done in a timely manner.
Based on our experience working with SPAC sponsors and management teams of target companies, we see three best practice strategies to being public-company ready that will increase the likelihood of a successful deal and help the target company thrive. These are: performing a public-company readiness diagnostic and gap assessment; supplementing the target company management team with appropriate skillsets and revamping the talent proposition; and strengthening the corporate governance framework.
1) Performing a public company readiness diagnostic and gap assessment
Conducting an assessment of the target’s readiness to operate as a public company can provide a wealth of information, from structuring the path forward to even doing the deal, particularly if the required change is a heavy lift in terms of the effort/time needed or the significance of the risk or issue, such as major cultural change. We suggest using a process that identifies the key risks and issues, estimates the amount of effort and timing required to address them, and facilitates a remediation or enhancement plan with timelines and metrics to track progress.
Completing this assessment as early as possible should also accelerate completion of the public company journey.
Careful planning and execution of this process is critical to initial transaction success, as the target management’s time should be focused on running the business and executing against the business case underwritten and sold to investors. Completing this assessment as early as possible should also accelerate completion of the public company journey, ensuring the right people, processes, technology, governance, reporting, and controls are in place.
2) Supplementing management skillsets and revamping the talent proposition
As a sponsor of any deal, one of your first actions is to evaluate the quality of its management team and change key positions to get the right team in place to execute the go-forward plan. In a SPAC transaction, this similar process would take place but, incrementally and depending on the specific target management situation, there could be wholesale additions to the team to get all of the required skillsets in place to operate effectively as a public entity and achieve the likely aggressive growth agenda with the capital invested in the business.
This people dynamic, with its associated actions, may be the most critical determinant of deal success.
This people dynamic, with its associated actions, may be the most critical determinant of deal success. The magnitude of people change can be significant depending on where the target company is on its lifecycle and not having the need to focus on certain public company governance and compliance requirements. Many SPAC target companies are emerging growth companies operating on shoestring budgets due to being capital constrained, dictating fewer, and potentially less qualified, people to execute the new business plan. In addition, the public company requirements mean bringing in resources with different skillsets as those types of talents are not in place.
In the traditional category of people change, it is about upgrading management talent. In our work with SPAC target companies, it is also about recruiting new functional resources, such as those set forth below.
For a public company with a more aggressive business agenda, the people equation is much more complicated and critical to get right. Changes are typically required in the way employees are recruited, managed, evaluated, recognized, rewarded, and retained. It’s essential to have a clear and regular communication plan, which covers how changes will impact employees and addresses areas such as new requirements as a public company, for example stock options and compliance.
3) Strengthening the corporate governance framework
A good corporate governance framework consists of many parts, but the three critically important ones are: new policies and procedures required of a public entity; an effective board process; and revised operating processes to implement and execute the business plan.
Most private companies do not have corporate governance guidelines or the key policy and practice statements required to operate effectively as a public company. Typically, this is a heavy lift and they should be developed, approved, and implemented on day one of the merged entity.
Developing policies alone is not sufficient; comprehensive training and a process to monitor compliance are critical for success. All employees, management, and the board should be trained on their content and required compliance procedures. In addition, a process should be established for monitoring adherence to these policies.
Most SPACs need to implement more formalized ways to engage with their boards of directors after they transition from private to publicly traded companies. Boards not only operate as part of an effective corporate governance process but also can support the company’s growth agenda and business operations through their background and knowledge of the target company industry, key relationships, and previous operating experience.
The directors will need to be on-boarded and the company should follow a process of continuous business education for the board members so that they stay abreast of the coming business issues and opportunities. When done right, the board can be a value-enhancing and competitive differential part of the go-forward business. When done wrong, they are viewed as a necessary evil with limited value-add. In addition to these effective board processes, constant and consistent communication between management and the board is essential. There should be a timely, candid, and open dialogue not only in meetings but whenever appropriate to get advice and direction, or to provide key information. Two best practices to keep in mind are to over-communicate and operate under a “no-surprises” modus operandi.
New operating processes are typically required to effectively operate as a public company and to enhance key processes so that the business can scale effectively. For example, new processes need to be put in place for developing board materials and communicating with the street through quarterly earnings releases. Likewise, think about how business development initiatives should be evaluated, assessed, and presented, whether for acquisitions, business expansion, or other growth-oriented activities.
SPACS have rewritten the rules in the initial public offerings market by paving the way for smaller, less-established companies to go public faster and more easily. Now, these complex takeover vehicles may unlock even greater value for public capital markets. But this can only happen if they shift their focus to adopting the management best practices of public companies to create even greater value for their shareholders.
With this opportunity come the risks associated with non-compliance and loss of reputation. In order to mitigate these risks, every effort needs to be made to professionalize the business and adopt a culture of compliance.