Building your financial acumen and understanding the implications of a SPAC is critical to your journey as a board member or executive. You don’t need to be a financial expert or a board director to have heard about SPACs (Special Purpose Action Company) as one pathway for taking a company public. In 2020, there were 494 companies that went public, compared to 242 in 2019 – impressive considering all of this occurred during year one of the Covid-19 pandemic. The popularity of SPACs played a large part in this massive increase; in fact, SPACs accounted for about half of the IPOs in 2020.

Athena Alliance held a Salon with Tamar Donikyan, partner at Kirkland and Ellis, dedicated to SPACs and the pros and cons of forming a SPAC to go public. Tamar practices corporate and securities law with an emphasis on the representation of publicly traded companies, and the formation, financing, and general representation of emerging growth companies. She has counseled the public and private clients in a range of corporate securities matters, including initial and follow-on public offerings of equity and debt, mergers and acquisitions, venture financings, SEC reporting, and compliance in corporate governance.

Read on to understand what SPACs are, what you should consider as a private or public company executive or board member, and what the transaction really means. If you’re a member of Athena Alliance, you can watch the Salon any time on-demand.

What is a SPAC? 

According to Tamar, “A SPAC is a special purpose acquisition vehicle, it’s a public company, and it is a company with no business but simply a pool of money that has been gathered for the purpose of finding an acquisition target.”

A few key aspects of a SPAC:

• The amount of money a SPAC raises can be anywhere from $50M to billions of dollars
• SPACs must use 80% of the  money that it has in trust to do a transaction
• It’s not unusual to see the transaction value for SPACs to be in the multiples of the amount it has in trust, rather than simply 80% of the total.
• Normally a SPAC has about 18 to 24 months to do a transaction.
• A SPAC is divided into private shares and public shares, with the sponsor group of a SPAC holding 20% of the company’s common stock.

How does the compensation work in a SPAC post-transaction?

The post-transaction management and board do not typically mirror the SPAC management and board. Throughout the business combination process, one of the key factors is a discussion of how many board members a SPAC will retain in the combined company.

But remember, a SPAC is really a vehicle for a private company to go public. The management post-deal will be of the public company and the significant portion of the directors will also be directors of the private company, or that are chosen, from the private company.

“What does it mean to really do a SPAC transaction? The best way to think about it is that it is an acquisition and IPO all rolled into one,” Tamar explained. “And people will always think about or talk about the SPAC as being a more efficient way to do a transaction, that it’s a much quicker deal. That does not mean that we are cutting corners in any which way.”

How does an SPV differ from a SPAC?

An SPV is a Special Purpose Vehicle. According to Tamar, “an SPV is a transaction type that you use in private transactions. An SPV is typically not publicly traded, it is not owned by hundreds and thousands of people like a public company is.”

What happens when private equity groups exit via a SPAC?

Private equity groups choose a SPAC as their exit path quite often. Private equity portfolio companies are one of the key sources of target companies for SPACs. It’s also not unusual to see some private equity companies have multiple portfolio companies in the market at the same time.

When a private company is acquired by a SPAC, the public vehicle will be the entity in which all of the shareholders will ultimately hold their shares. The merger transaction with a SPAC is structured such that the SPAC will acquire the entire target company, and in exchange for all of the securities of the target company, it will issue SPAC shares to such target shareholders. The target company shareholders will, more often than not, end up as the majority holders of the SPAC at the end of the deal.

Who is the sponsor of a SPAC?

A SPAC sponsor refers to the group of people that get together to form the SPAC. The members of the sponsor entity also become the directors and officers of the SPAC. They are the SPAC CEO, CFO, vice presidents, essentially the executive team of the SPAC entity. They are charged with sourcing the deal.

How is a SPAC different from an IPO?

Tamar notes that the due diligence involved in both deal structures is the same. She says, “A SPAC team will do the underwriter level of due diligence. A target company that is getting ready for a SPAC transaction is really not doing anything differently than they would for an IPO in that regard. You are still giving a full data room responding to a fulsome due diligence request list, having the SPAC sponsors review and check and confirm your customers, your suppliers, and other relationships, diving into your projection models, and also making sure that any of the covenants that are required for third-party consents of any transactions or anything like that are obtained as well.”

But there are benefits to the SPAC transaction, Tamar notes: the commitment of capital. “More often than not these days, we see that the SPAC transaction has a committed financing that is announced alongside a merger agreement. For example, if the merger agreement requires that there be 300 million dollars available for a deal to close, at the same time that the merger agreement is announced, there will be a committed financing from institutional investors that has a 300 million dollar number on it . . . Whereas an IPO, you really don’t know whether or not you’re going to get the interest of investors and the retail market.”

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