How to go Public by Merging with a SPAC

Once a SPAC decides to merge with a company, a lengthy and complicated process ensues to complete the transaction. Find out how a SPAC merger works here.

Barry Shevlin

Barry Shevlin

Over his career, Mr. Shevlin has completed over $350 million in capital transactions with institutions including private equity firms, family offices, syndicated bank groups, and subordinated debt providers.

In the last few years, SPAC mergers have become something of a trend in the financial world. In 2020, for instance, there were close to 250 SPAC IPOs completed in the U.S., raising over $80 billion. Although 2020 was a record-breaking year for SPACs, as of April 2021, the U.S. has already seen over 300 SPAC IPOs completed, with close to $100 billion raised. significant amount of capital has been raised in the public markets via SPACs to acquire a variety of private companies. Many of these mergers have taken and continue to take place in Silicon Valley, where mature tech startups are ripe for the picking and await an opportunity to go public.

Because of the way SPACs work, a SPAC merger looks a little different than a traditional merger. Read on to learn more about these mergers and what happens on both sides of the transaction.

What is a SPAC anyhow and why is it so popular all of a sudden? Read on to learn more about the SPAC trend, how it works and why it may be a good thing to consider.

Criteria for a SPAC Merger


One of the first things to consider when determining whether a company is a good fit for a SPAC merger is the industry the business operates in. Although there has been a significant increase in SPAC activity across industries in recent years, the most active sector has been technology. Accordingly, privately held operating companies in the technology sector are prime candidates for SPAC transactions.

Another item to consider when thinking about a SPAC merger is size. SPACs vary widely in size and the size of transactions they are seeking to consummate vary just as widely. The capital raised in the IPO of the SPAC generally is much smaller than the enterprise value of the target company that is ultimately acquired. SPACs typically sell additional equity or equity-linked securities to complete a merger, in addition to raising debt financing. Although many of the recent high-profile SPACs have pursued larger targets, there are plenty of opportunities in the middle market as well, with enterprise values below $1 billion. Thus, private companies in the technology sector with revenues as low as $100 million or lower can consider a SPAC merger as a viable option. Once industry and size determinations are made, a company can engage a financial advisor to search for and reach out to SPACs that are suitable potential merger partners for the company. As there are a number of SPACs out there due to the recent exponential growth in the SPAC market, it is critical to work with an experienced investment banker to seek out appropriate merger partners, based on industry, size and other important preferences to vet out with an advisor, as SPACs seek a variety of target attributes in their search for a suitable target.

When thinking about a potential merger with a SPAC, there are a number of additional assessments that a company needs to make since it will be moving to public company status and the timeline to make this adjustment will be much shorter than usual. It will need to determine if it is ready for public ownership and take the steps necessary to prepare for that change. These discussions may cover

everything from accounting and financial reporting, as the company must be ready to submit audited historical financial statements in compliance with public company standards (PCAOB), to governance and proper auditing procedures, including the effectives of its internal controls and procedures for Sarbanes-Oxley reporting and establishing appropriate levels of oversight, such as an audit committee. The company should also carefully examine its financial planning and analysis functions, as well as tax matters, compensation, treasury, enterprise risk management, technology and its cybersecurity framework.

Target companies should not only assess their financial and reporting condition and requirements, but also conduct careful due diligence into the SPAC, its management team, board, financial sponsor and large investors as part of its preparation for a SPAC merger. Key questions to address include:

1. What are the reputations and track records of the financial sponsor and the key players in the SPAC’s management team?

2. Do they have a complete understanding of the target’s industry and business?

3. Do the sponsors or major investors have conflicts of interest or other relationships in the industry?

4. How will the leadership and management styles of the target company and the SPAC management team work together?

It is important for the board of the SPAC to align with the target company, use of stock, employees, M&A strategy, governance, cultural fit and network. The SPAC’s management team should bring value to the target company, including an ability to streamline and synergize the target company, similar to what any private equity investor would offer to a private company. As with any deal, the team that will run the company after the transaction closes has to work together, which is an important issue to consider as part of the SPAC process.

In addition, the target company should carefully review the terms of any rollover equity. For any shareholders of the target company that will retain a management rollover stake after the de-SPAC transaction, it will be critical to fully understand the terms of this equity stake, including when and at what price it could be sold. Understanding the economics of the rollover stake also requires reviewing the capital structure, business strategy and financial condition of the SPAC. Any rollover equity holder should conduct diligence on the SPAC.

Benefits of Working with a SPAC


There are a number of benefits of working with a SPAC for a target company, including the following:

  1. It can be a more efficient and cost-effective way to go public compared to the traditional IPO process. Since the SPAC manager is handling the IPO process, the company can gain the benefits of access to public markets and public ownership without as many of the risks;
  2. The target company benefits from a knowledgeable, experienced management team, which will help enhance investors’ objectives;
  3. SPACs have cash on hand, which aids in creating immediate capital appreciation and value for the company in the transaction. Knowing that an acquirer has cash readily available in an account and having a currency for acquisitions are both significant benefits, in addition to having access to public capital to fund operations or growth;
  4. The SPAC structure also affords sellers the ability to structure the transaction to include cash-outs and earn-outs that are not normally available in an IPO process;
  5. From an operational standpoint, the reputational improvement of being a public company is positive for customer interactions;
  6. Allows for the inclusion of financial projections in the proxy statement for approval of business combination, which is not available through the traditional IPO route; and
  7. Ability to negotiate terms and set a fixed purchase price before the merger is complete, which is not possible with the traditional IPO route because the final price is not determined until right before the company begins to trade.

Seeking Shareholder Approval


In the early stages of a SPAC, shareholders are unaware of which ultimate company they are going to purchase, which is where the terminology “blank check” comes from. After the IPO is completed, the potential targets that the SPAC is pursuing remains confidential, which is an advantage because it avoids having to give too many disclosures. However, once the SPAC hones in on a target that it can move forward with and before an ultimate merger can be consummated, a SPAC must disclose to its shareholders the target company it intends to acquire. At that point, investors can decide to keep their shares in the SPAC and become investors in the newly combined company or redeem their shares and get repaid the full amount they invested plus interest.

Investors who own warrants are permitted to keep them even if they redeem their shares. At this point of the SPAC process, investor motivations are quite different. While institutional and retail investors may keep their shares and stay on as investors in the new company, hedge funds may likely redeem their shares. Hedge funds that purchased units during the SPAC’s IPO can sell their shares for a gain if the stock price increases after deal announcement, but if the price declines they can redeem their shares for cash and keep the warrants at no cost, allowing for potential upside with no downside risk. Redemptions are in fact utilized often.

According to a recent Stanford and NYU Law study1, a median of 73% of SPAC IPO proceeds were returned to shareholders through redemptions during 2019 and the first half of 2020. Given that SPACs generally use a significant portion of their IPO proceeds to pay shareholder redemptions, they typically have to raise new capital to ensure they can complete the merger. Therefore, SPACs issue new shares to third party PIPE, or private investment in public equity, investors and the sponsors.

Assuming a suitable target is found, the last stage in the SPAC process is the de-SPAC transaction where the SPAC completes the merger. Shareholders typically have an opportunity to vote to approve the transaction, which must be in accordance with SEC proxy rules. If they approve, the merger is completed and the merged company is then like any other publicly traded company. The target company’s shareholders will generally control the majority of the combined company, while the SPAC’s public shareholders, PIPE investors and sponsors hold a minority stake.

Recent Changes to this Process


One of the biggest changes to the SPAC merger mechanics has been to the process after a SPAC announces the company it intends to acquire and investors decide whether they want to keep or sell their shares. In the old days, some investors would team together and threaten to vote no on the transaction, if they were not given certain special privileges. At the time, the right to sell shares and the right to vote yes or no on an acquisition were tied together. These days, those are two separate processes, and the investors do not have a say in which company a SPAC ultimately acquires. They can elect to trade in their shares to redeem their capital, but they are far more limited from impeding a successful transaction than they were previously.

Information Provided to Shareholders


Once a target company that the SPAC wants to move forward with is identified, the SPAC has to disclose a variety of information to its shareholders. This information includes not only the identity of the target company being acquired, but also relevant historical and projected financial information, including management discussion and analysis, or MD&A, and pro forma financial statements that provide a more complete financial view of the merger. The MD&A provides shareholders with the target company’s full financial condition and reasons behind certain financial trends, such as significant sales growth or margin expansion over a given time period. These disclosures will also typically include a description of the proposed merger for shareholders to review, as well as descriptions of corporate governance matters. The SPAC will also prepare and file a proxy statement at this time.

Learn More About the SPAC Merger


A SPAC is a great way for companies to go public without all of the scrutiny, time and costs of the traditional IPO process. It is also a great opportunity for investors, as it is generally a safe investment with limited downside risk and meaningful opportunity for capital appreciation. While the merger process can involve a number of steps, parties and regulations, these transactions generally move quickly.

If you would like to learn more about how a SPAC merger works, check out the rest of our site at CAVU Capital. We provide investment banking services for emerging and mid-market technology companies. Contact us today if you would be interested in seeing if your company is a good candidate to go public via a merger with a SPAC.

1 Source: BofA Global Research, “The rise of SPACs – A primer on SPAC structures & impact to capital markets”, February 19, 2021; Michael Klausner and Michael Ohlrogge, “A Sober Look at SPACs”, 9.

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