The Drivers of SPACs and Why They are Here to Stay
Jeffrey C. Selman represents emerging and middle-market public and private technology and life sciences companies and investors. He has particular experience advising on the creation and funding of special purpose acquisition companies (SPACs), as well as advising on the use of SPACs as a means of taking companies public.
At the DLA Piper 2021 Healthcare Leadership Conference, both Josh and Jeff will join a panel to discuss the latest developments in capital markets for healthcare companies including SPACs. technology and life sciences companies as well as investors on their formation, equity and debt financing, mergers and acquisitions and general corporate and commercial transactional matters. Jeff has specific experience advising on the creation and funding of SPACs.
Q: In your opinion, what is driving the recent focus on SPACs and is the SPAC boom here to stay in 2021?
JOSH: The recent focus on SPACs has been driven by many factors, including the increased market acceptance of SPACs as a vehicle to go public, the strong valuations experienced by companies during the deSPAC process and the relatively short process in which a SPAC transaction can get done.
JEFF: Over the last 20+ years, for a variety of reasons, there has been a significant diminishment in the number of public companies that has been exacerbated by structural impediments to companies joining the ranks of the public. This has led to a significant concentration of companies in the hands of private ownership, notwithstanding the fact that many of these companies could be public. Between 2015 and 2017, various parties undertook efforts to make it possible for SPACs to begin to whittle away at the public/private imbalance that had arisen. By 2019, enough early entrants into this wave of the SPAC market had successfully taken companies public, and with success begetting further success, a snowball effect first began to change the nature of the institutional investors into SPACs.
This further generated attention and a recognition by both investors and operating companies that SPACs were an effective vehicle for bringing companies to the public markets. While 2020 reflected more than four times the number of new SPACs than the record-year of 2019, the first seven weeks of 2021 have already reached 60 percent of the volume of 2020.
With such a large number of SPACs that are funded with a significant amount of capital, even if there is a slowing in the number of new SPACs being formed, it is highly likely that the business combination boom will continue to take companies public as there is such a large amount of capital that is sitting in trust accounts of SPACs ready to be deployed.
Q: Given the excitement around SPACs, what do companies need to consider when deciding between a traditional IPO mechanism or a SPAC?
JOSH: While many companies are suitable SPAC targets, some factors that lean in favor of a SPAC transaction vs. a traditional IPO are companies that have a difficult IPO story but could have public market success post-IPO. This include companies that could benefit from premier management expertise at the SPAC level, companies where the ownership group has different monetization objectives and companies where a sponsor/owner wants to sell a larger percentage than an IPO may support.
JEFF: The key differences that I like to have operating companies focus on are the inversion of the timing of price discovery and the shortened timeframe for public company readiness preparation. SPAC business combination transactions move quickly. From the time that a company decides that it wants to pursue a business combination, it may be executing a letter of intent with a SPAC as quickly as 30-45 days later, with that letter of intent representing the initial price discovery, and to be quickly followed over the next 30 days with a PIPE (private investment in public entity) marketing process that will provide further price discovery validation.
Simultaneously, the company is negotiating a merger agreement for the business combination, preparing for the first filing with the SEC, while also likely driving changes to its board, management and internal controls over reporting to be ready to be a public company as soon as 90 days after announcement of the merger agreement. This is an incredibly compressed timeframe to make the leap from private to public and we often see it being done by companies that didn’t necessarily have it in their business plan a mere six months ago. Given the speed and intensity at which this process moves, it is not for the faint of heart.
Q: Has DLA Piper’s guidance for health companies changed with the rise of SPACs? And if so, how?
JOSH: The rise of SPACs has created exciting new alternatives for healthcare companies. While many healthcare companies have historically looked to private equity or strategic transactions to monetize or grow their businesses, SPACs have allowed healthcare companies to pursue monetization transactions at much earlier stages than they have historically, especially for healthcare companies that have benefited from the COVID-19 pandemic. In addition, healthcare companies are able to utilize public company stock as an acquisition currency to facilitate acquisitions and more rapid growth than they otherwise would have. This has substantially changed the conversation with growing healthcare companies that are looking to take their business to the next level.
JEFF: I often get inquiries from operating companies asking if they should consider a SPAC after seeing a competitor announce a SPAC combination. My response to this question is always the same: make sure that they understand that the SPAC business combination process is an intense process that compresses the timelines for going public significantly.
If companies understand that and are still prepared to undergo the process, I then remind them that going public by way of a SPAC enables them to both obtain capital (and potentially some immediate liquidity) and gain access to the public capital markets. They are also provided with the benefits that their competitor received and to enhance their ability to compete. This presents the business case to the operating companies with the pros and cons to consider whether they are ready to make the plunge. SPACs were not something that most companies had on their radar 15 months ago, but all that they seem to be thinking about today.
Q: Looking ahead, what do you believe are the emerging industries for SPACs?
JOSH: I believe healthcare will continue to be an active industry for SPAC combinations, especially for healthcare companies that are able to capitalize on technological innovations, whether they do so in telehealth, which has been buoyed across healthcare specialties because of the COVID-19 pandemic. Companies that leverage technology in other industries will remain attractive for SPAC combinations, such as PropTech and EdTech. However, given the broad array of SPACs currently seeking targets, any growth company could be a target for a SPAC.
JEFF: Healthcare services and technologies is one of the very significant industries that has been a favorite target for SPACs, and we have seen a number of SPACs formed to focus solely on this industry. With a large number of companies in this space that are owned by private equity and that have reached a point of maturity, it is not surprising to now see SPACs seeking to take healthcare companies public in the numbers that we have been seeing in recent months and expect to continue to see. Other industries that have had significant levels of interest from SPACs are fintech, emerging automotive technologies and aerospace and defense.
