2020 was certainly an unpredictable year, but an interesting trend that emerged is the mounting popularity of going public through a SPAC merger. M&A activity is expected to be strong throughout 2021, as growing numbers of CFOs are seeing stabilized finances and the market is seeking outlets for pent up demand, ample funding, and low interest rates.
While SPACs are an attractive option to fast-track an IPO, a recent Wall Street Journal article cautions, “Finance chiefs looking to enter the public markets through a merger with a SPAC should brace themselves for a complex, nerve-racking transaction.”
While there are many considerations and requirements for organizations engaged in M&A or SPAC deals, one that should not be overlooked is identifying efficiencies in Accounting and Finance (A&F).
This blog highlights three key considerations and recommendations for private companies and SPACs looking to merge and go public.
What Is a SPAC?
A SPAC is a special purpose acquisition company that exists solely to hold cash and merge with a private company to take them public. After raising enough funds, the SPAC will list through a traditional initial public offering (IPO). They will then search for a private company to merge with, thereby taking their target public.
SPACs are an appealing way for private companies to go public because the merger can take only a few months, a much shorter timeframe than going public through a traditional IPO. Additionally, private companies can benefit from the expertise and relationships a SPAC has in a particular industry.
According to the Wall Street Journal and data from Refinitiv, there have been 81 US companies that have joined forces with SPACs since the beginning of 2021, and demand is projected to continue with more than 550 SPACs globally looking for acquisition targets.
3 Recommendations for SPAC Mergers
Public Company Readiness Is Key
Target companies must put in place proper governance and A&F infrastructure to address complex public company compliance issues like financial statement and SEC filings, which are even more intricate in SPAC deals.
Public companies created via a traditional IPO are granted a one-year waiver to comply with the SEC’s internal control compliance regulations, giving them time to get their house in order. A public company created through a SPAC, on the other hand, must comply with the SEC’s rigid compliance timelines from day one with no grace period.
To be ready, the target company must devote considerable time and resources to highly technical accounting and reporting considerations. The best way to prepare is to practice functioning as a public company—for example, completing the month-end close within a ten-day cadence, performing all necessary SOX controls, and completing reporting requirements.
Evaluate Talent Gaps
Going public, whether through a traditional IPO or SPAC, is complicated. Leaning on the experience of investors or sponsors is certainly an advantage of merging with a SPAC. However, private companies must work to ensure they have the people and skills necessary to operate efficiently and effectively as a public company.
The most critical skills gaps tend to be in revenue recognition, SEC reporting, and general technical accounting. Private companies should start early in identifying and filling these needs to avoid delays, any indications of material weaknesses, or in the worst-case scenario, the need for a financial restatement.
CFOs at private companies looking to combine with a SPAC have to do three things at once: negotiate the merger, prepare to become a public company, and raise funds from investors—making it all the more critical to have the right people run and perform necessary A&F functions.
Investing in Technology Is a Differentiator
In addition to having the right people and skills in place, private companies that have efficient and scalable processes are more attractive targets for SPAC mergers. A key driver is having the right technology to ensure accurate and timely financial information for forecasting and other business decisions.
Spreadsheet-based processes, for example, can make it difficult to access information, and the lack of standardization can negatively impact productivity and introduce unnecessary risk of error. Centralizing and automating A&F processes in the cloud can provide both a quick win and a foundation for longer-term transformation for public company success.
With process automation, A&F and other stakeholders can see how their company is performing in real time, which creates tremendous competitive advantage. By keeping a close eye on the numbers, executives have better insights and knowledge of opportunities and areas for improvement.
Join us for this webinar on May 13, featuring expert partner Connor Group, to learn more about how to set up A&F for a successful IPO or SPAC merger.