October 25, 2020
By Mike Blankenship and Eric Johnson
Through the first three quarters of 2020, more than 100 special purpose acquisition companies (SPACs) have gone public, raising more than $41 billion and setting records for the total number of initial public offerings (IPOs) and dollars raised.
Interest in SPACs has exploded in recent years, as demand for an alternative to the traditional IPO model grew. We expect the number of SPACs will continue to increase in 2020 and beyond. Unlike a traditional IPO, where the company interested in going public engages in roadshow presentations and negotiations with multiple investors (and potentially greater exposure to market uncertainty and longer times to go public), companies interested in going public through a business combination with a SPAC negotiate only with one other party—the shell company that has already undergone the work to go public and raise money in trust—thus the process can move much more quickly. In addition, there is greater certainty with respect to the financing available to close the deal. The sponsor, board, and management teams will use their networks and experience to find the business combination best suited for shareholders.
SPACs are structured with sponsors, boards, and management teams searching for targets in a variety of industries, from the gaming industry with companies such as DraftKings and Golden Nugget, to space travel with Virgin Galactic, to electric vehicle companies like Hyliion, to energy transition, and many more.
As SPACs have grown in popularity, a variety of innovations have been developed in response to both SPAC and target needs. One of the more recent innovations for SPACs has been the “Up-SPAC,” which combines a traditional SPAC structure with the Up-C process (where an existing non-corporation entity undertakes an IPO through a newly formed corporation). With the Up-SPAC structure, founders are subject to more favorable tax treatment, including issuance of shares pursuant to profits interest and stepped-up basis rules upon the conversion of founder shares to SPAC common stock.
An Ideal Target
With so many SPACs looking for business combinations, we have identified common characteristics of ideal target businesses to ensure long-term success:
1. Public company ready.
2. Ability to scale. The ideal target will have growth potential in its industry in general as well as the ability to recruit high-quality and attractive bolt-on acquisition candidates.
3. Strong equity story. In order to sustain a broader and longer-term investor base, the target will need to be an entity that investors can understand and appreciate the future opportunities.
The Right Team
As we approach the end of 2020 and the beginning of 2021, SPACs will likely continue to be very popular as an alternative to the traditional IPO, especially as new permutations of the SPAC structure are created to fit the needs of the companies seeking to go public and the investing public. However, an important part of the SPAC process will always be creating the right team of management and directors that can leverage their experience and networks when searching for the best target companies to take public.
SPACs should consider adding former or current members of private company boards to their own management and boards of directors because these individuals can use the knowledge they have gathered on how private boards operate and the processes that they are comfortable with, in addition to their knowledge and experience in the target industry, to find the best fit possible.
Mike Blankenship and Eric Johnson are corporate partners in the Houston office of Winston & Strawn LLP. They routinely counsel public and private companies on strategic transactions, capital markets offerings, including SPAC initial public offerings, and general corporate, ESG, and securities law matters. Reach them at email@example.com and firstname.lastname@example.org.