In the past few years, investors have been flocking to these blank cheque companies in a SPAC boom. As a result, the US market has become crowded and competitive. There are hundreds of US SPACs with billions of dollars in dry powder — capital that has been committed but not spent — looking for target companies.
Regulators in the US have responded with increased scrutiny and even charges. Meanwhile, many countries such as the UK, Luxembourg, Hong Kong and Singapore have changed or are considering changing rules to encourage SPACs on their own exchanges.
Given these trends, it may not come as a surprise that many US SPACs are targeting cross-border markets, including emerging markets and developed countries in Europe and Asia. Companies across multiple sectors are poised to capitalise on the SPAC boom — from pharmaceuticals to renewable energy and even to retail. Target companies in the technology sector, including fintech and space exploration, are particularly sought after given their potential for rapid growth, so we highlight them in this article.
To give some examples, Cazoo, a UK-based online car seller company, recently went public on the New York Stock Exchange via a SPAC based in the US. Singapore-based Grab Holdings is in the process of going public via a US SPAC, a merger valued at $40 billion. ReNew Power, India’s biggest renewable energy company, listed on Nasdaq via SPAC and achieved a market capitalisation of $4.5 billion— the largest listing of an Indian entity to date.
A new path to exit for owners of tech companies
More than ever, SPACs are a realistic fundraising and exit option for founders of tech companies and their PE sponsors — particularly companies based outside the US. SPACs present an alternative to the long-established path to exit, traditional IPOs.
Compared to a traditional IPO, SPAC mergers operate on an accelerated timeline. While an IPO usually takes between one to two years, a target company in a SPAC merger must be prepared to go public fairly quicky — often within a few months. Going public via a SPAC requires a significant level of organisational governance and infrastructure, so target companies tend to be more well-established.
Another benefit of going public through a SPAC is a guaranteed price that doesn’t fluctuate depending on market conditions at the time of listing. SPACs also provide increased flexibility for founders when it comes to negotiating the terms of stock rollovers and other incentives that would otherwise not be available.
For companies with a growing market, record of sustained growth and an experienced management team, exiting through a SPAC may be a viable opportunity. With over 400 US SPACs boasting a combined $348 billion in funds, and an increasing number of them targeting Europe, Asia and emerging markets, tech companies located outside the US should be evaluating their possible paths to exit. However, with increased regulation and scrutiny, companies looking to exit through a SPAC must be prepared to comply with regulatory requirements to reduce the risk of challenge from financial authorities.
Preparing for an exit via a SPAC
With due diligence and comprehensive preparation, owners of potential target companies can increase the likelihood of a successful SPAC deal.
First, if company owners are seriously considering a SPAC exit, they should take steps to make their company a more attractive target. The best way to do that is to get internal houses in order. While compliance requirements for public companies vary by industry, all potential target companies will need to be prepared for the demands of going public. Owners must pay careful attention to requirements around corporate governance, subsidiary management (particularly across borders), accounting and financial reporting.
The quicker a target company thinks and acts like a public company, the better chance it has to succeed. Critically analysing leadership gaps and needs will not only place the company in a stronger light for potential acquisition, but also pave the way for a successful de-SPAC down the line. Company owners should consider how strong the current management team is and where additional expertise may be needed. Founders of companies should look for strategic partners — both investors and experienced sponsors — to establish a strong leadership team. Operating companies should understand that SPACs have an increasing role in guiding the company post-de-SPAC, especially with regard to controls and governance. When eyeing a potential SPAC deal, founders should discuss goals, expectations and business synergies with the SPAC sponsors so they are aligned on growth objectives and understand governance needs.
Despite the boom, a SPAC exit strategy is not without risks, and any target company pursuing one should exercise caution.
Owners of potential target companies should consider where a SPAC is in its lifecycle. SPACs typically have two years to acquire a company before the SPAC is dissolved and all funds returned to investors. If a SPAC is close to failure date, the deal may be rushed through, which could expose management to challenges from investors following the de-SPAC.
In a SPAC deal, the fine print is critical in setting up the exit for success. When evaluating a potential merger, owners should determine if the SPAC’s investment criteria are a good fit with the company’s current sector and market. Owners should also assess whether the valuation is realistic. Finally, owners should consider whether the SPAC identified the target company through existing connections. If so, there could potentially be challenge on inside dealing or any conflicts of interest.
Tech companies located outside the US are in a strong position to capitalise on the current SPAC boom. As long as owners of these potential target companies are savvy about the risks and prepare for a strong SPAC exit, this approach to going public can be a lucrative and prudent path forward.
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