SPAC as an Alternative to IPO

Why SPACs are still one of the best alternatives for mid-market companies to get listed

 

Going public is often a milestone for mid-market companies, but a traditional IPO can be complex, time-consuming and costly, leading many companies to seek alternative routes to the public markets. One such alternative is merging with a so-called Special Purpose Acquisition Company (SPAC) – a process that is referred to as a de-SPAC or a business combination.

While SPACs have been around for many years, their popularity has recently increased, with a record number of SPAC IPOs in 2021. According to Nasdaq, there were 613 SPAC listings in 2021, raising a total of $145 billion. However, the number of listings declined significantly in the following year, with only 86 listings raising a total of $13.42 billion. Despite the decline, it should be noted that 2022 still constituted part of a growth trend in SPAC deals when viewed from a long-term perspective, with a 46% growth from 2019. Activity was unusually high in 2020 and 2021, and SPAC deals are expected to grow at a more sustainable pace in the future.

In this article, we will look into the world of SPACs and examine why they are still one of the best alternatives for mid-market companies to be listed. We will explore the benefits of de-SPACs and compare them to traditional IPOs to provide a more comprehensive understanding of this method to go public.

Potential earlier access to public markets

Gaining liquidity is one of the key advantages of going public. However, an earlier IPO may not always be feasible due to the size of the company or early-stage nature of its business. SPACs offer a possibly faster route to accessing public capital markets, which means that the process of going public is often faster and smoother compared with traditional IPOs. According to a report by KPMG, the average time to complete a SPAC merger (as of 2021) was around 3-6 months, while an IPO usually takes 12-18 months. This can be particularly beneficial for mid-market companies that need to access public capital markets quickly.

As SPACs are already listed companies with raised capital, they have already met the necessary listing requirements which mid-market companies might otherwise struggle with. For instance, to be listed on NASDAQ, a company must meet a certain set of financial requirements, such as having a market cap over $75 million or having high profitability. By going down the SPAC route, mid-market companies can avoid the potential hurdle of having to fulfil these requirements on their own, which makes merging with a SPAC (“de-SPAC”)  a possibly simpler and less time-consuming alternative to an IPO.

* Currently traded companies qualifying solely under the Market Value Standard must meet the $75 million market value of listed securities and the $4 bid price requirement for 90 consecutive trading days before applying.

** Read the Nasdaq listing requirements and standards: Rules | The Nasdaq Stock Market

*** Securities subject to resale restrictions for any reason are excluded from the calculation of publicly held shares, market value of publicly held shares and round lot shareholders. In addition, except for SPACs listing under IM-5101-2, at least half of the minimum required number of round lot holders must each hold unrestricted securities with a minimum value of $2,500.

Potential to Access Capital Faster

In addition to the potential for earlier market access, SPACs offer mid-market companies the opportunity to gain access to capital faster compared to traditional IPOs.

This is because the SPAC vehicle has already raised money within the entity itself, which means that the target company can access that capital directly upon merging with the SPAC. In contrast, in a traditional IPO, the company starts from zero and needs to work with an underwriter to raise capital, which can be a challenging and lengthy process.  Due to conflicting interests, underwriters may commonly set a lower market price in the traditional route to make their work easier. By comparison, in the SPAC route, the parties involved negotiate a capital commitment and a binding valuation months prior to the merger. Thus, the SPAC route could potentially offer mid-market companies the potential to raise more capital faster than in an IPO. However, it is important to note that while SPACs hold a significant amount of capital, shareholders still reserve the right to redeem their investment before a merger. Due to this, the actual amount of capital available to the target after the business combination might fluctuate.

De-risking Company Valuation

Another advantage of SPACs is the ability to negotiate valuation very early in the transaction, allowing mid-market companies to de-risk the company´s valuation through “meaningful testing”. In this context, this refers to the idea of reducing the risks associated with setting the company´s valuation through negotiations, testing and due diligence, which can be conducted much earlier in the process than in a traditional IPO.

With a SPAC, the valuation is negotiated early in the transaction, which can reduce uncertainties and risks. Additionally, SPACs can provide projections in their proxy statements, which can help clarify and communicate the growth prospects of a business. While projections are not unique to SPACs, mid-market companies may find it easier to get valued through the use of projections in a SPAC transaction.

This is different from the traditional IPO process, where companies do all the preparation work and forecasting to become public, but only know their valuation when the underwriter “tests the waters” with potential IPO investors to determine pricing at the IPO.

Faster Due Diligence Process

SPACs can be structured in a way that allows for a faster and more streamlined due diligence process. The time required for due diligence in the SPAC process is typically faster than in a traditional IPO. This can be particularly beneficial for mid-market companies that may have limited resources and want to complete the transaction quickly.

Greater Control Over Timing and Pricing

SPACs also offer more control over the timing and pricing of the transaction. As a result, target companies have more control and can choose to go public when market conditions are favourable. This can be particularly beneficial for mid-market companies that may have a harder time forecasting what their valuation will be in a traditional IPO.

Potential for Strategic Partnerships

Finally, SPACs offer a unique opportunity for target companies to partner with a sponsor that has a strategic interest in the company’s success. Sponsors often have extensive experience in the relevant industry and can provide valuable insights and connections to help the target company succeed.

Considerations

While SPACs offer many benefits for mid-market companies, there are also some considerations to keep in mind. It’s important to understand that a SPAC allows public investors to redeem their investment, which means that the cash reserve upon closing might not be the same as the original IPO. However, it’s worth noting that the redemption rate may vary depending on the company’s circumstances. The amount of money that the company keeps after investor redemptions can be influenced by a range of factors.

Another factor to consider with SPACs is that the capital cost may be higher than in a traditional IPO, due to sponsor promotion and warrant dilution. Some SPACs may also have warrants, which can lead to additional dilution. These factors, along with the potential for shareholder redemptions to lower the amount of available capital from the SPAC post-merger, mean that target companies should always consider their own specific circumstances and weigh the benefits and drawbacks of de-SPACs before deciding whether to pursue this route.

Summary

In conclusion, SPAC mergers offer mid-market companies several advantages over traditional IPOs, including potential earlier market access, quicker access to capital, more control over valuation and flexibility in deal structure. By taking advantage of these benefits, mid-market companies can access public capital markets more efficiently and effectively, helping to fuel their growth and success. While there are considerations to keep in mind, the benefits of SPACs make them a compelling alternative for mid-market companies looking to get listed.

 

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