Fueled by piles of capital, special-purpose acquisition companies want to take your company public. But are they the best route to a listing?
Scott Henry, CFO of Skillz, is a veteran of capital raising and exits. He steered Beats Music through its $3 billion sale to Apple in 2014. A decade before, he saw casino gaming company Las Vegas Sands through a $690 million public listing. But in August, when Henry joined Skillz, a monetization platform for game developers, he jumped headfirst into a different kind of transaction: a special-purpose acquisition company IPO.
SPACs, a kind of "blank check" company, are flooding U.S. equity markets. They raise capital in an initial public offering and use the proceeds to acquire a public-ready operating business not yet identified. Once a SPAC selects a target operating company, that business merges into the SPAC shell company and becomes publicly traded.
For example, Skillz is merging with Flying Eagle Acquisition, the sixth SPAC raised by former MGM CEO Harry Sloan and CBS Entertainment president Jeff Sagansky. The deal is expected to close in the fourth quarter. Though Skillz management had already chosen the SPAC route before Henry joined Skillz, he says the structure offers speed, greater flexibility, and other benefits over a traditional IPO. A SPAC deal, in many ways, is just as akin to a merger as an IPO.
This kind of backdoor IPO transaction "is a faster path to market-three to four months versus the typical six to nine months for a traditional IPO," Henry says (once the SPAC and target have agreed to combine). That means less distraction for the target's management throughout the process.
Skillz has a lot of company. About 175 SPAC vehicles listed this year on U.S. exchanges (as of November 10), compared with 59 in 2019, according to SPACInsider. The average size is $363 million. About 18 of those SPACs have announced the target company they are acquiring. (SPACs have up to two years to find an operating company to buy.) So, there is an enormous amount of raised capital looking for midsize to large companies to purchase.
Numerous factors kicked off the 2020 SPAC revival (the buildup of private capital looking for big returns, choppy equity markets, mixed success for traditional IPOs). The market is getting so heated that big names like Richard Branson, former Congressman Paul Ryan, and Donald Trump adviser Gary Cohn are getting in on the action. However, there are sound reasons why these transactions particularly appeal to some CFOs.
The Advantages
Fewer and fewer management teams are willing to go through the time-intensive process of a traditional S-1 filing. While the filing requirements for a SPAC deal are not trivial, the target doesn't have to disclose historical financials or offer a lengthy list of business risks, according to the Harvard Law School Forum on Corporate Governance.
SPACs also protect the target (somewhat) from the whims of the market. Market volatility and unpredictable investor sentiment affect the pricing of a traditional IPO, according to a Deloitte report, "Private-Company CFO Considerations for SPAC Transactions." A SPAC deal, however, values the target outside the market through negotiations between the SPAC and management.
That occurs months before the merger transaction closes and the target company is listed.
Another advantage to SPAC deals, Henry points out, is that the target company can share forward financial projections as part of its regulatory filings. "In a traditional IPO, the internal model is not shared with the investor [and analyst] community; in a SPAC, it is shared."
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