‘Astonishing’ SPAC activity set to continue this year

Special purpose acquisition companies (SPAC) are increasingly being used as a tool to acquire or merge with existing companies. For example, it was recently announced that 23andMe, the hugely popular consumer genetic testing company, was to go public via a SPAC, and Bloomberg even carried a heading in January warning of a “SPAC frenzy”. But what are they and how do they aid mergers and acquisitions (M&A) activity?

Although the criteria can be quite loose, SPACs are essentially empty blank-cheque companies who look for M&A targets based on investment criteria that is usually aligned with their founders’ expertise and announced on listing, explains Matt Cole, corporate partner at DLA Piper Ireland.

The SPAC and its chosen target enter into a merger but then the SPAC structure essentially falls away, leaving a more traditional listed operating company. For various reasons, this approach to listing is very attractive to all stakeholders – founders, SPAC investors and target companies, Cole explains.

“There is a limited initial capital requirement from founders and most of that investment is not at risk. Also, because the SPAC has no operating history at IPO its listing process is much quicker, cheaper with much more execution certainty than would be the case for a normal commercial company,” he says. When compared to a private equity investment, SPAC investors will also see greater liquidity and a much easier exit, he adds.

Funding

SPACs also give smaller investors, who normally would not be able to buy into hedge funds or private equity funds, a participation route into the acquisition of private companies. “Even if the SPAC ends up failing to consummate a deal, their IPO proceeds are protected and ultimately returned if the SPAC cannot secure an investment,” explains Cole.

As for target companies, at a time when funding is challenging, it can be a fast and cost-effective way of accessing capital as reversing into a SPAC provides access to public markets minus the uncertainty associated with the traditional IPO route. “Crucially, instead of exiting the business completely by way of a traditional sale, shareholders in the target can retain upside potential and benefit from holding liquid stock in a public company,” he says.

But once they list, SPACs are effectively working against the clock. Their terms dictate that they will be liquidated, and funds returned to shareholders if they do not make an acquisition within a set time period known as its “outside date”, which is usually within 18-24 months.

Cole points out that SPACs are “not new”, and they have seen a steady growth in popularity since 2017.

“However, by any measure, SPAC activity in 2020 was astonishing. There were 240 IPOs of SPACs in the US in 2020, which represented a fourfold increase over 2019. In January of this year alone there were 90,” he says, adding that DLA Piper’s SPAC lawyers in the US have been working “around the clock” for the past 12 months. He also notes that the coronavirus pandemic has been instrumental in their rise. “It has forced companies to seek additional capital but at the same time brought volatility to equity markets making the successful completion of traditional IPOs unpredictable.”

Boost IPO activity

“They’re super attractive because they allow the lead investors to co-invest with well-credentialed sponsors and access capital much more quickly,” adds Anya Cummins, head of Deloitte Private and a partner within Deloitte’s M&A Advisory. She also points out that these vehicles in the US and UK could still potentially look to Ireland for acquisitions “so even though they’re not listed on an Irish market they could still be relevant from a deal-making perspective”.

The UK is seeking to boost IPO activity following Brexit and SPACs are top of the list for review – Ireland could yet benefit from this, Cole adds. “It will be interesting for Ireland if the UK changes its listing regime and London becomes a European hub for SPAC listings.”

Given the volume of SPACs looking for targets, all working to broadly the same outside date, it is inevitable that 2021 will be a record year for SPAC M&A activity, he says. Most US SPACs are sector-focused and those tend to be sectors where Ireland is very strong including technology, pharma, fintech, energy and life sciences.

“We can predict that US SPAC acquisitions are likely to be a feature of Irish M&A in the next two years in some form. What we don’t know is whether that will be a trickle or a flood.”