Top 5 Characteristics of a High-Quality “SPAC” Acquisition Target

by Chris Williams, Attorney / Shareholder

Many experts called 2020 the year of the SPAC fund and that trend has continued in 2021. A SPAC, or Special Purpose Acquisition Company, is a vehicle created by a group of investors to fund and complete a future acquisition or acquisitions. These entities have only one purpose: To find a private company to buy, taking them public upon closing.

SPAC funds are attractive to private companies because a SPAC transaction may offer them a more efficient process for going public. The average time it takes to travel the traditional path of an initial public offering (IPO) is typically at least a year. A SPAC fund can help companies go public in a few months, removing the need to go out and find investors, work long and hard with investment banks, or do much of the other prep work required to go public. There may also be fewer fees involved when working with a SPAC fund.

Business owners who want to go public often view a SPAC fund as a shortcut or “magic bullet” to financial prosperity. But not all companies should go public – and not all companies are high-quality SPAC acquisition targets.

In general, a strong SPAC acquisition candidate should be close to being ready to be a publicly reporting company prior to engaging in a SPAC transaction.

When evaluating a target company, the SPAC will often look at 5 key factors:

  1. A strong management team

 The most successful transactions are the result of leadership that has extensive knowledge of their particular industry. Companies that are led by a Chief Executive Officer, Chief Financial Officer and a strong legal team with prior public company experience will be more attractive SPAC targets. Once the transaction closes, the acquired business becomes a public company, meaning quarterly and annual reporting begins soon after and management must also establish an investor relations team to comply with SEC regulations and any requirements of the stock exchanges on which they are listed. Recognizing this, the critical question for the SPAC fund is: Can this particular leadership team deliver a great return on our investment?

  1. Financial systems and reporting in place

The most appealing SPAC target companies have a strong accounting team and robust accounting systems and processes. Gone are the days of having only 2-3 employees managing the books. In the process of being listed on an exchange and going public, there are several detailed disclosures that must be filed within tight deadlines. Public companies must be able to close their books consistently on time, must be prepared to have their financial reports audited, and must show they have proper internal controls and procedures in place, among other requirements. An experienced CFO is necessary to implement and meet the financial and reporting requirements of a publicly held company. If a company does not have a strong CFO and accounting team, it may be less attractive as a SPAC candidate.

  1. Corporate governance familiarity and alignment

Proxy advisory firms such as Institutional Shareholder Services Inc. (ISS) and Glass Lewis provide corporate governance for investors, meaning the most attractive SPAC targets should be familiar with the work these firms do and pre-identify any issues within their companies that could attract attention. Hedge funds, mutual funds and similar organizations that own large blocks of shares of public companies pay these firms to advise them regarding certain shareholder voting matters. For example, pay for top executives will be scrutinized when a SPAC goes public. If ISS or Glass Lewis sees the top compensation structure as out of line, this information will be shared publicly and could affect the target company’s stock value. Similarly, Board diversity has been a recent issue with proxy advisory firms. The bottom line is that public companies don’t always act on the counsel of proxy advisory firms; nonetheless, that counsel should be seriously considered.

  1. A mature company lifecycle

 The maturity of a company is a big consideration when it comes to SPAC fund targets. Buyers are looking for a history of strong, healthy growth coupled with a plan for a sustainable future. Target companies should also be large enough to ensure that once they are public, there are sufficient shares to provide for liquidity. Similarly, ideal SPAC targets will be able to maintain a sufficiently high trade volume to avoid large shifts in stock value based on trades of small number of shares. All of these lead to one key driver – research analyst coverage. Top SPAC targets with a solid, proven history and lifecycle that can attract research analyst coverage within their industry are the most likely to get attention from SPAC funds.

  1. Growth opportunities

A private company is attractive to investors because they see potential strategic growth in that company. If the company goes public, what are the stock proceeds going to be used for? Are there any plans for future research and development? Will the company grow by acquisition? A well-thought out, detailed strategy with a plan to drive revenue and to grow after the transaction closes is another critical signal to a buyer that the company is an attractive SPAC target. The ideal synergy between the target company and the SPAC fund will allow for mutual idea generation and planning, with assistance from the SPAC management, but ultimately the success of a SPAC transaction will depend on the growth of the acquired company.

For privately owned businesses who have dreams of SPAC success, these are some of the key elements that are attractive to fund managers.