What Private Tech Firms Should Watch Out for in SPACs

The Information, 2020-07-20

A Bit of Theory

  • SPACs are “Special Purpose Acquisition Companies”, a public (!) firm with only cash as an asset, which is used to acquire another firm to make it instantly public.

  • Closing a deal with a SPAC and becoming public is roughly 3-4 months’ work vs 6-9 months to do the listing [actually longer].

  • 2020 (!!!): 44 SPACs went public ($13.5B) vs 31 SPACs ($7.4B) in 2019.

Why Do It?

  • If SPACs have experienced Board Directors (who will stay) or committed investors believing in the business. (otherwise it’s a drag)

  • Listing via a SPAC reduces volatility as opposed to the usual boom and bust.

  • Oversupply of SPACs: money chasing acquisition targets.

What to Look for in SPACs

  • Strong Leadership. Experienced Directors make a big difference. Or even can put in their experienced CEO. [MK: Clearly an incumbent CEO will jump for joy.]

  • Committed Investors. The best deal is when the SPAC investors believe in the industry and hold on to the investment.

  • Lockup Periods. They are not necessarily standard but with SPACs they seldom cover all employees.

  • Realistic Expectations. SPACs are not blind and are smarter than an average investor Joe. Also, high incoming valuation for a business is likely to drop.