Typically, a SPAC has two years to locate and sign a deal, or it is required to return the investor monies (subject to extension by the stockholders). This creates a pressured timeline to perform target location, proper due diligence and selection of the target, and final de-SPAC completion of the transaction. With the acquisition of an insurance target, our initial SPAC overview concentrated on the special regulatory considerations which can compress the workloads of both the pursuing SPAC and the target company management. With this in mind, in this article, we shift to the side of the target company management, board of directors, and investors.
Things for Investors, Target Management, and Board to Keep in Mind:
- Though the following considerations are not necessarily consistent occurrences in the SPAC universe, there are some important economic incentives used by sponsors that public market investors and target boards should contemplate.
- First, investment banks defer a heavy component of their fees until the merger is finalized. Investors should keep in mind that those banks will get paid even if the majority of SPAC shares exchange for cash;
- Second, the target management may be pressured to develop frothy projections to attract PIPE investors (private investor public equity) to the table, which in turn is intended to attract future public markets;
- Third, at the onset, SPAC sponsors generally have a very low-cost basis in their promote shares, along with accompanying inexpensive warrants. Though a no-merger situation may occur, in this case the sponsor loses its initial investment and loses two years in the target hunt. Yet, sponsors can still recognize some substantial profits if the SPAC merges with an unexceptional company, even though the stock trades off by 50%. In this case, it becomes a dream case for the short seller. As the clock runs, there is an incentive to quickly meet those initial incentives.
- The total volume of funded SPACs in the marketplace has led to a shortage of targets, which can further lead to overpayment for the limited number of targets. This can tempt sponsors to participate in exceedingly promotional disclosure language.
- Of critical importance, target management and boards should clearly and honestly consider their current ability, internal staffing, and knowledge base to be truly prepared to quickly enter life as a public company (more on this to follow). This includes strong governance practices, solid internal controls, and investor communication skills.
The Target Back-office is a Crown Jewel – Don’t Leave it in the Dust:
Just noted in the prior section was the need for target management and its supporting board to make an honest assessment of its current internal ability to meet the aftermaths of a SPAC acquisition/merger. The target board and senior management must have leadership acumen to assess its facility to truly accept the fallout from this type of acquisition. Some key considerations include:
- The target financial department will typically not be postured for the high-volume of financial requests and reporting that will follow a SPAC merger – the sheer volume can quickly become a morale issue that simmers and remains repressed in the target back office;
- The company knowledge-base of the target financial back-office personnel is one of the most valuable assets of the SPAC merger’s continuing success – both the SPAC and target leadership will eventually be measured on how well they utilize and protect this knowledge asset at all costs. Truly experienced people-leaders will see this dilemma and act appropriately; inexperienced technical leaders will not;
- The shift to public reporting for the target will create a sudden change in audit requirements governed by PCAOB standards. It will create quite an alteration in the required knowledge-base of target financial associates, notwithstanding the substantial increase in the volume of public reporting and disclosure requirements;
- The target and acquiring SPAC leaderships should understand that most private company (target) financial departments are neither leading-edge knowledgeable nor staffed to digest the thrust into a sudden SPAC merger and the accompanying onslaught of reporting requirements that follow such an action. In most circumstances, prudent action to quickly engage additional professional accounting support personnel will likely be needed. The current target auditor should be drawn upon as a first responder since this group has intimate knowledge of the target accounting process, systems, internal controls, and governance process.
The purpose of this series of articles has been to provide candidly, without bias, both sides of the SPAC universe from the acquirer and the target perspective, with a particular focus on the insurance arena. These fast-paced, intricate transactions can quickly invade and overwhelm the private target atmosphere. Target leaders must be reliably prepared for a SPAC versus being surprised by a SPAC. This is critical in order to circumvent the likely potential of the target financial back office becoming overwhelmed, with the inevitable fallout of morale issues and latent defection that follows.