When PSPC calls you, 5 things a startup CFO should know

CFOs looking to enter the public market through a merger with a PSPC should prepare for a complex and nerve-racking transaction.

Essentially large pools of liquidity, special purpose acquisition companies spring to life at a rapid pace as investors scour the markets for new opportunities.

SPACs, which typically have two years to complete an acquisition, start by raising upfront funds from private investors and then sign up through a traditional initial public offering. After the IPO, SPACs start looking for companies to merge with, thus taking their target audience.

According to data provider Refinitiv, 81 U.S. companies have joined forces with PSPCs since the start of this year. And there is a demand for more merger prospects, because more than 550 SAVS in the world are looking for acquisition targets, said Refinitiv.

Tech startups in particular are in high demand.

“Almost all of the companies in the portfolio are approached by PSPCs,” said Navneet Govil, CFO of

SoftBank Group Body

Vision Fund, the world’s largest technology investment vehicle with over $ 90 billion in investments. Mr. Govil last week hosted an IPO readiness event for CFOs of some of the fund’s portfolio companies. PSPC transactions were the order of the day, he said.

For startups and other private companies, merging with a SPAC may be the quickest route to public markets compared to a traditional IPO. But, there are a lot of things financial executives need to keep in mind, including general market sentiment.

“It’s complicated,” said Anna Pinedo, a securities partner at Mayer Brown LLP, a law firm. “As a CFO, you need to have experience running a public company and be ready to get started. “

Executives of startups seeking to partner with a PSPC must do three things at once: Negotiate the merger; prepare to become a public company, with all the disclosure and reporting requirements that come with it; and raise new funds from investors.

Here are some tips for CFOs when considering a PSPC merger.

State the objectives of the PSPC transaction

Leaders need to have a plan and a vision of why their company should deal with a SPAC. These strategic considerations may vary depending on the individual business model or the financial implications of an agreement.

Katie Rooney, Chief Financial Officer of Alight Solutions.


Photo:

Lighting solutions

“There are different reasons for PSPC transactions, it’s very specific to the company,” said Katie Rooney, CFO of Alight Solutions, a business solutions provider who announced in late January that it would combine with a SPAC. Once the transaction is completed, Alight will be able to deleverage its business faster than if it had chosen a traditional IPO, Ms. Rooney said.

This was one of the objectives of the agreement, along with the expansion of its activities, she added. The company recorded a down payment on debt of $ 1.86 billion in a recent investment document announcing its merger with PSPC. The company still has about $ 2.27 billion in debt remaining, according to the document.

Seen Inc.,

a smart window maker, expects its merger with a SPAC sponsored by investment bank Cantor Fitzgerald to open up more business opportunities.

“Our partner PSPC maintains a close relationship in the real estate market through its investment in a real estate brokerage firm,” said View Vidul Prakash CFO. “We thought that would give us access to connections for the renovation of commercial buildings, a good sales lead. “

Evaluate PSPC

Those who aspire to merge with a PSPC should examine the entity’s leadership and track record, said George Arison, founder and co-CEO of the online car dealership.

Change technologies Inc.,

which was made public by this kind of transaction last year.

Managers must analyze the number of investors in an SPAC and determine the conversion ratio of their assets, or warrants, into shares of the new entity. This calculation will determine the degree of dilution of shareholders once the transaction is completed.

“Fewer terms means less dilution,” said Mr. Arison.

These warrants allow their owners to buy shares at a certain price if the PSPC transaction is successful, but become worthless if PSPC does not merge with another company during its two-year lifespan, said. Mr. Arison.

Warrants make investments in an SPAC attractive and can also be traded. But there are concerns that such holdings will make it difficult to calculate the shareholder dilution they will entail, Arison said.

George Arison, Founder and Co-CEO of Shift Technologies Inc.


Photo:

David Paul Morris / Bloomberg News

Warrants are generally awarded a fraction of the value of a share of the combined entity. In the case of Shift, there were around 7.5 million outstanding warrants. The company, after merging with SPAC and going public, launched a takeover bid to buy back the warrants in exchange for cash and a fraction of a share per warrant, Mr. Arison.

Some advisers recommend a rule of thumb: the estimated equity value of the new company should be at least three times the amount of cash held by the SPAC in order to avoid a financially less attractive mix.

CFOs should also review all public documents filed by PSPC and look for any liabilities or loans that could weigh on the new company, said Alysa Craig, head of PSPC at

Stifel Financial Corp.

, an investment bank. “You have to be very careful to read every file, every footnote, every 8-K,” Ms. Craig said.

Check how much time is left at PSPC

Most SPACs have two years to complete an acquisition. Executives need to know how much time a SPAC has left before they have to start repaying investors.

“There are risks involved in making an agreement with an end-of-life SPAC,” said Ms. Craig. This may result in an extension of the SPAC, which allows existing shareholders to buy back their investment, thereby reducing the amount of money available for the merger. Still, shareholders who redeem their investment may stick to their warrants, which risks diluting other investors once the deal is done, she said.

Anna Brunelle, Chief Financial Officer of Oster.


Photo:

Expulsion

“There’s a time bomb on a PSPC,” said Anna Brunelle, chief financial officer of Oster Inc., a company that builds lidar sensors for autonomous vehicles, robotics and other uses.

CFOs need to be sure that they have chosen the right partner, as it can be very damaging to a company’s reputation if the merger is not completed.

“If you are abandoned, you lose your edge,” Ms. Brunelle said, referring to the ability to find another PSPC combination or raise capital. Earlier this month, Ouster began trading on the New York Stock Exchange after a PSPC deal with

Colonnade acquisition Corp.

which valued the company at $ 1.9 billion.

Prepare the PIPE

Company executives working on a PSPC transaction simultaneously seek additional capital with their sponsor so that the combined entity has more money than the initial amount PSPC raised for its trust fund.

Investors in such transactions, called private equity investments, or PIPEs, agree to buy shares when the merger ends and the company goes public. Shift, for example, sold about 18.5 million new shares to PIPE investors, Mr. Arison said.

In almost any combination between business and SPAC, a PIPE fundraiser takes place while the merger is being negotiated, said Ms. Craig of Stifel.

Private companies are flocking to Special Purpose Acquisition Companies, or SPACs, to bypass the traditional IPO process and get a public listing. The WSJ explains why some critics say investing in these so-called blank check companies is not worth the risk. Illustration: Zoé Soriano / WSJ

Get your finances checked

Companies must have at least two years of audited financial statements before they can enter into a PSPC transaction, in accordance with standards set by the Public Company Accounting Oversight Board.

“A lot of private companies that might consider merging with a SPAC might not have the systems in place” to shut down their books in a timely manner, said Ms. Pinedo of Mayer Brown.

CFOs will also need to become aware of the financial regulations that govern public enterprises.

“Once you’re a public company, you need to step up your reporting and have controls under Sarbanes-Oxley,” said Felipe Dutra, the former chief financial and technology officer of brewer Anheuser-Busch InBev SA, referring to the law. that requires large companies and their accountants to attest to adequate internal controls. Mr. Dutra has teamed up with other investors to launch a SPAC this month.

It may be more difficult to find an auditor to review a company’s finances these days due to the current PSPC boom, said Mike Meyer, partner at Union Square Advisors LLC, an investment bank.

“There are so many companies looking to go public through an SPAC, it’s a bottleneck,” he said.

Write to Nina Trentmann at [email protected]

Corrections and amplifications
George Arison is the founder and co-CEO of online car dealership Shift Technologies Inc. An earlier version of this article incorrectly described him as founder and CEO. (Corrected March 29)

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