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In Practice

The Rise of SPACs: How Private Enterprises Are Going Public

Special purpose acquisition companies, known as SPACs, have emerged as a popular way to access the public markets. They act as sponsors with the means to deploy capital and typically realize attractive returns. While the pace of new SPAC filings has slowed in recent months, many sponsors have jumped into the SPAC market. In fact, there are currently around $180 billion of SPAC-capital-seeking merger partners, according to IHS Markit. 

This reflects a highly competitive environment in which success, to a large degree, will depend on the use of traditional deal-related strategies, such as a high-quality equity capital market story, partnership with respected public investors in public equity and industry expertise in the target sectors. Public-company readiness is also critically important for transaction success. 

But making the transition from a private to a public company is not an easy or straightforward process and must be done in a timely manner.

Based on our experience working with SPAC sponsors and management teams of target companies, sponsor companies can ensure public-company readiness largely by evaluating the target company’s needs and providing resources to close any gaps. This includes drafting a transition timeline, evaluating where the target company employees could expand and deepen their skill sets, and creating formal policies, which are often not established in private companies. Focusing on these areas will increase the likelihood of a successful deal and help the target company thrive.

Is the Company Ready to Go Public?

Conducting an assessment of the target’s readiness to operate as a public company can provide a wealth of information, from structuring the path forward to even making the deal, particularly if the required change is a heavy lift in terms of the effort and time needed or the significance of the risk or issue, such as major cultural change. A process that identifies the key risks and issues, estimates the amount of effort and timing required to address them, and facilitates a remediation or enhancement plan with timelines and metrics to track progress can guide the sponsor company’s decision-making.

Careful planning and execution of this process by the sponsor company is critical to initial transaction success, as the target management’s time should be focused on running the business and executing against the business case underwritten and sold to investors. Completing this assessment as early as possible should also accelerate completion of the public company journey, ensuring the right people, processes, technology, governance, reporting and controls are in place.

Supplement Skill Sets and Revamp the Talent Proposition

As a sponsor of any deal, one of your first actions is to evaluate the quality of the target company’s management team and change key positions to get the right team in place to execute the go-forward plan. In a SPAC transaction, this similar process would take place but, incrementally and depending on the specific target management situation, there could be wholesale additions to the team to get all of the required skill sets in place to operate effectively as a public entity and achieve the likely aggressive growth agenda with the capital invested in the business.

This people dynamic, with its associated actions, may be the most critical determinant of deal success. The magnitude of people change can be significant depending on where the target company is on its lifecycle and not having the need to focus on certain public company governance and compliance requirements. Many SPAC target companies are emerging growth companies operating on shoestring budgets, where fewer, and potentially less-qualified, people are executing the new business plan. In addition, the public company requirements mean bringing in resources with different skill sets, as those types of talents are not in place.

In the traditional category of people change, it is about upgrading management talent. It is also about recruiting new functional resources, such as a chief people officer and head of investor relations.

For a public company with a more aggressive business agenda, the people equation is much more complicated and critical to get right. Changes are typically required in the way employees are recruited, managed, evaluated, recognized, rewarded, and retained. It’s essential to have a clear and regular communication plan, which covers how changes will impact employees and addresses areas such as new requirements as a public company, for example, stock options and compliance.

Public Companies Need Policies

A good corporate governance framework consists of many parts, but the three critically important ones are: an effective board process; revised operating processes to implement and execute the business plan; and new policies and procedures required of a public entity, including a code of business conduct and ethics, employee handbooks and a whistleblower policy.

Most private companies do not have corporate governance guidelines or the key policy and practice statements required to operate effectively as a public company. Typically, this is a heavy lift and they should be developed, approved, and implemented on day one of the merged entity.

Developing policies alone is not sufficient; comprehensive training and a process to monitor compliance are critical for success. All employees, management, and the board should be trained on their content and required compliance procedures. In addition, a process should be established for monitoring adherence to these policies.

Most SPACs need to implement more formalized ways to engage with their boards of directors after they transition from private to publicly traded companies. Boards not only operate as part of an effective corporate governance process but also can support the company’s growth agenda and business operations through their background and knowledge of the target company industry, key relationships, and previous operating experience.

The directors will need to be on-boarded and the company should follow a process of continuous business education for the board members so that they stay abreast of the coming business issues and opportunities. When done right, the board can be a value-enhancing and competitive differential part of the go-forward business. When done wrong, they are viewed as a necessary evil with limited value-add. In addition to these effective board processes, constant and consistent communication between management and the board is essential. There should be a timely, candid, and open dialogue not only in meetings but whenever appropriate to get advice and direction, or to provide key information. Two best practices to keep in mind are to over-communicate and operate under a “no-surprises” modus operandi.

New operating processes are typically required to effectively operate as a public company and to enhance key processes so that the business can scale effectively. For example, new processes need to be put in place for developing board materials and communicating with the street through quarterly earnings releases. Likewise, think about how business development initiatives should be evaluated, assessed, and presented, whether for acquisitions, business expansion, or other growth-oriented activities.

SPACs have rewritten the rules in the initial public offerings market by paving the way for smaller, less-established companies to go public faster and more easily. Now, these complex takeover vehicles may unlock even greater value for public capital markets. But this can only happen if they shift their focus to adopting the management best practices of public companies to create even greater value for their shareholders.

With this opportunity come the risks associated with non-compliance and loss of reputation. In order to mitigate these risks, every effort needs to be made to professionalize the business and adopt a culture of compliance.

Casey Barnes-Waychus

Principal, Financial Services and Digital Practices at Oliver Wyman

Casey is a principal in Oliver Wyman’s Financial Services and Digital Practices, based in New York. She has 10 years of experience helping private and public sector clients solve challenges related to strategy, innovation, and transformation.

Chaitra Chandrasekhar

Partner at Oliver Wyman

Chaitra advises senior decision-makers across the private and public sectors on questions related to strategy, innovation, policy, analytics and transformation. Chaitra has 15 years of experience helping clients, ranging from national governments to large private and supranational entities across the Americas, EMEA and Asia. She is passionate about inclusion, gender issues and financial health.

Tom Taylor

Partner at Oliver Wyman

Based out of New York, Tom leads Oliver Wyman’s private equity operational services, with expertise in mergers and acquisitions (M&A) as well as post-acquisition value enhancement including buyer and vendor diligence, business transformation, operating model design, carve-outs and integrations, and cost take-out.

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