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Avoid These SPAC Pitfalls

An understaffed management team is just one of many errors that will lead to an unsuccessful SPAC transaction.

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FEI Daily spoke with Derek Malmberg, a partner with Deloitte & Touche LLP and the national SPAC team leader for Deloitte's Audit & Assurance business and David Oberst, a partner in the Risk & Financial Advisory practice of Deloitte & Touche LLP, about how senior-level financial executives can ensure a special purpose acquisition company (SPAC) acquisition stays on track.

FEI Daily: What are some of the biggest reasons that these deals are gaining in popularity?

Derek Malmberg: Clearly and undeniably, we are in the midst of a SPAC boom. The current and explosive growth in SPAC transactions is in direct correlation to continued search for yield among investors and increasing allocation to alternative asset classes.  2020 also was an attractive year for SPACs as they offer price certainty on transactions which is particularly important in times of heightened market volatility.

FEI Daily: Is it fair to say that speed is both the biggest benefit and challenge of SPAC deals?

David Oberst: SPAC deals can be negotiated within a matter of weeks, which is in stark contrast to traditional IPOs. Traditional IPOs play out over a prolonged period, which in turn creates a window of opportunity during which a deal can easily fall apart.  SPACs, on the other hand, provide a bit more certainty when it comes to price and that is a really attractive attribute of these type of transactions --  along with speed to market. Companies recognize and are attracted to these benefits: an online poll  we conducted in September found that more than 40% of respondents who  identified themselves as C-level and executives preferred the speed of a SPAC over an IPO.

To be fair, some organizations have expressed concerns over meeting regulatory compliance given the shorter SPAC timeline, which is what we are calling the double-edged sword of embracing this exit strategy trend. The regulatory “paperwork” for a SPAC is similar to an IPO, however, in many cases it is more burdensome to create due to the complex nature of SPAC transactions.  Furthermore, there is a major difference in the timeline – which is significantly compressed --  and that can be incredibly difficult for some companies to manage effectively and efficiently.  Even the long runways leading up to normal IPO listings can be challenging for companies to execute given the huge demands on translating private company reporting to public company requirements and getting the necessary SEC filings in place.

FEI Daily: Can you outline the ways senior-level financial executives can ensure a SPAC acquisition stays on track?

Malmberg: Given the complexity of most SPAC deals and the related accounting and financial reporting requirements, finance teams want to surround themselves with a  “SPAC savvy” team of advisors – legal, accounting and financial reporting, investor relations – professionals who are SPAC road-tested and experienced. It’s next to impossible for most finance executives to get up to speed on all these complexities, moreover they risk making a costly mistake or delaying the deal.

With an experienced SPAC team in place, the key is to make sure to review and fully understand the terms of the offering and the implications they will have on deal value as well as the potential future dilution to shareholders. This will help finance leaders stay on top of the deal, map next steps and effectively run due diligence.

Additionally, it is important for finance executives to fully understand the reporting requirements that will need to be met in order to enact a SPAC transaction.  Although the amount of time between announcement of the deal and closing of the deal can vary considerably based on the readiness of the operating company, it can be as short as four to six months. So, as you can see,  it’s important that a clear plan and resources are in place to enable the company to be nimble in its execution.

Finance teams also need to have a deep understanding of the complex accounting and SEC reporting rules and regulations for a SPAC in order to:

Determine the historical periods for which target company financial statements are needed in the proxy statement or Form S-4, while giving consideration to staleness dates.

Apply public company accounting standards and public company adoption dates for new standards, if required, and reflect their impact on the organization’s financial statements. This may be especially rigorous for smaller private companies, which may face a bit of a shock and crash course education when it comes to public company accounting given it’s a big shift from what they are likely accustomed to.

Determine the “acquirer” for financial reporting purposes. 

Draft pro-forma financial statements reflecting the appropriate accounting based on the terms of the deal.

Determine the impact of historical acquisitions and dispositions, which may involve additional financial reporting requirements, and consider potential consultation with the SEC. 

Successfully respond to SEC comments. 

Sorting through all of this to close a SPAC acquisition is only the beginning, however. Financial executives will need to be prepared to meet public reporting obligations in the post-SPAC close period. At this stage in the process, the company has a true opportunity to make a focused effort to elevate people, processes, and technology to support the demanding reporting schedule of a public company.

FEI Daily: Tell me more about the potential impact on valuations or goodwill impairment testing.

Oberst: One common pain point we see in SPAC transactions is the need for companies to reverse their historical private company GAAP elections in order to meet public company GAAP requirements.  The most common example is needing to reverse goodwill amortization (which is not allowed under public company GAAP) and perform goodwill impairment testing for historical periods.  This can be time consuming and impact audit timelines if not appropriately planned.

FEI Daily: What are some of the pitfalls the finance team should be on the lookout for with these transactions?

Malmberg: As in any of investment, an understaffed management team and a lack of fully understanding all the nuances of the SPAC deal terms and reporting requirements can undermine the transaction and lead to an unsuccessful SPAC transaction. Even though SPACs are at the height of their popularity, our poll still uncovered that one quarter of all respondents had concerns about the compressed timeline along with another 29% who believe that understanding regulatory compliance may be the most challenging aspect to executing a SPAC deal.

With more than 200 SPAC IPOs yet to complete a business combination, there is huge opportunity for private companies to go public through a SPAC acquisition.  SPAC transactions are complex, however, combining the elements of both a sale and an IPO.  Therefore, in order to be successful, financial executives should be certain to make sure that they have the right resources and expertise, both internal and external, to address the complex requirements and compressed timelines that are inherent in these deals.