Equities: December 22, 2006
SPACs: backing the jockey, not the horse: more investors, CEOs and private companies are turning to SPACs. Betting on management never made more sense.
By Ellenoff, Douglas S.; Neuhauser, Stuart
A SPAC --or specified purpose acquisition corporation--is a newly-formed company, organized by a group of executives with the sole purpose of going public, and using the proceeds of the offering to acquirea business.
From August 2003 through October 2006, about 130 SPACs have filed registrations with the Securities and Exchange Commission (SEC) and 72 SPACs have raised several billion dollars and have begun trading aspublic companies. Of those 72, about 15% have acquired a business and an additional 40% have announced proposed targets.
SPACs have typically raised between $50 million and $300 million to fund their acquisition strategies. The SPAC has a finite life of nomore than 18 months (which can be extended) to identify and concludean acquisition. Pending an acquisition, 95% or more of the IPO fundsare held in a trust account with a money center bank. In addition, the acquisitions are subject to approval by the public shareholders ofthe funded SPAC.
Surging SPACs
SPACs have recently surged in popularity as an alternative due to their ability to raise capital through the public markets to fund takeovers of private companies. However, SPACs haven't gained widespreadacceptance, due to their unique and often misunderstood structure. But it is this very structure that protects investors while motivatingmanagement, creating a healthy alignment of interests between them.
SPACs are subject to the same regulatory requirements as other public companies, such as filing public documents with the SEC.
Why CEOs Like SPACs
CEOs like SPACs because they enable them to capitalize on their prior accomplishments, which if recognized, will draw the interest of aSPAC underwriter. A fully funded SPAC permits management to concludean acquisition without the help of a private equity firm.
In a typical SPAC deal, management is issued 20% of the post-IPO equity--excluding dilution from any over-allotment exercise. As a condition to the IPO, the SPAC sponsors are obligated to purchase privately placed securities in an amount up to 5% of the financing. The funds invested are "at risk" capital and subject to being lost if no acquisition is completed in the allotted time. The sponsors don't have tooperate the acquired business--they may choose to keep existing management or recruit a new team altogether.
Why Investors Like SPACs
SPACs allow investors access to acquisition opportunities typically restricted to private equity funds. The securities sold to investors are publicly-traded, so there is some liquidity, whereas an investor in private equity is tied up for years and doesn't have the option of liquidating their capital. Investors are also issued warrants of the SPAC at a set price below the offering price. Investors are able to hold on to those warrants even ifthey opt-out and vote against the business combination (if such a combination is completed).
If the SPAC doesn't conclude an acquisition accepted by the shareholders, then the money held in trust is distributed back to the public shareholders (or if less than 20% of the public shareholders vote against the proposed target, they can get their pro rata amount returned from trust).
Investors have no discretion over the type of investment the private equity fund will make, as fundmanagers are not required to seek investor approval before making a deal. Investors believe that management can add value by increasing private company values through a public equity.
Why Private Companies Like SPACs
Many owners of emerging growth companies would prefer to sell to aSPAC rather than go public on their own because the SPAC is already funded, and the path to additional capital more secured. Additionally, working with the SPAC sponsors, management may be able to reach business objectives more easily. The SPAC can purchase a private companyfor stock while maintaining the cash raised in the IPO for future acquisitions or to grow the target business. This is particularly relevant in today's market, where the IPO market for small-to-mid size companies is weak. Though similar to a reverse merger, the SPAC providesfor a "clean" public vehicle with less risk.
Working together, the private management team may continue to operate the day-to-day affairs of the business while having access to theexperience of the sponsors who will continue to act as board members. Alternatively, owners of such growth companies would prefer sellingto a SPAC, either by cashing out or receiving publicly traded securities (as described below), and allowing the sponsors to operate the business going forward.
SPACquisitions
The acquisition can be structured in a variety of ways. Recently, two acquisitions have been structured such that the purchase price isall cash, a portion of which is raised by the SPAC in a simultaneousPIPE financing. For example, on September 27, 2006, Boulder Specialty Brands, Inc. announced that it entered into an agreement with GFA Brands, Inc., the maker of Smart Balance[R] and Earth Balance[R] food products for about $465 million in cash. To fund the transaction purchase price, various institutional investors agreed to purchase sharesof common and preferred stock of Boulder, in a simultaneous PIPE financing of $246 million. The purchase price of the target can also be paid for entirely in stock, or with a combination of shares and cash.
During the last two years, the SPAC program has demonstrated that managers can use this vehicle to raise significant funding and use those funds to acquire businesses aligned with their prior successes. In addition, individual investors can access acquisition opportunitiesonce reserved for private equity funds. Equally important, investorsget the right to approve or reject the proposed acquisition (and gettheir money back).
|
