by Lauren Dever
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Goldman Sachs sounded the popularity horn on special purpose acquisition companies (SPACs) in 2020. When the Churchill Capital IV and Lucid Motors deal was nearing a close, news of the deal sent Churchill’s stock soaring. At the same time, banking titan JP Morgan initiated a SPAC specialist team, and it appeared SPACs would continue their reign throughout 2021. However, the recent decline in CCIV stock, coupled with newly reported financial insights on the status of SPACs, suggests their prominence may now be dwindling a bit. In particular, JP Morgan is suggesting SPACS are at a peak, pointing to the recent drawdown in SPAC performance...and peaks usually signal pending declines. Adding to this mindset was Berkshire Hathaway’s Charles Munger’s recent prediction that the SPAC craze “must end badly.”
Despite these predictions of declining SPAC activity and recent disappointing SPAC performance, there have been a significant number of SPAC IPO’s so far in 2021, with a reported number of 248 to date. This, of course, links to another trend in M&A: serial SPAC sponsors. While the majority of SPAC sponsors are well seasoned dealmakers, some celebrities (Alex Rodrigez, Paul Ryan, and Shaquille O'Neal to name a few) are getting in on the action as well.
In such a whirlwind of SPAC activity, one thing is certain — it is critical for those in the M&A space to remain grounded in methodical best practices and the ultimate goal of value creation when raising and managing a SPAC process.
How Do SPACs Work?
A SPAC, sometimes referred to as a blank cheque company, is formed for the sole purpose of raising investment capital through an IPO (initial public offering). The money raised is put in a fund for the acquisition; if the acquisition does not take place within two years, the money is returned to the investors. A SPAC’s lifecycle flows from formation of the founder’s stock, to its public offering, to target search, shareholder vote, and close. Ultimately, a SPAC merger process can be completed in as little as three to four months versus the traditional IPO process, which can take multiple years, therefore, a SPAC is often thought of as a shortcut.
What Drives SPAC Popularity?
Investors and private equities ripe with cash and capital from sitting out much of 2020 is one of the reasons SPACs saw growing popularity in 2020 and early 2021; the celebrity interest previously mentioned also does not hurt, lending a bit of “glamour” to this investment profile. Additionally, the notion that SPACs invite less regulatory scrutiny and are lower risk, or at least somewhat more predictable given that pricing and valuation are done early, seemed to also drive SPAC activity. Of course, success breeds interest so as more SPACs generated value and made headlines, more players in the deal space considered them. However, as previously noted, SPACs are starting to lose their luster, and many investment professionals are raising a warning flag that SPAC’s purported benefits are becoming questionable.
Identified Benefits of SPAC Mergers:
The benefits of SPAC mergers can be broken into three categories: those for the target, for the investors, and for the sponsors. For the target, prime benefits include: speed and cost (they are a faster and, often cheaper, alternative to IPO) and not having to meet the IPO company size requirements. Moreover, SPACs often provide the target with experienced industry professionals and leaders that help ensure deal success. On the other side of the coin, benefits for the investors include reduced risk since funds are placed in escrow, coupled with the opportunity for increased input as they can pull out of a target they are not interested in. Additionally, there are opportunities for increased shares later on for investors. Finally, for sponsors, the ability to invest in late stage companies is one key benefit. Of course, the notion of 20% of SPAC shares post IPO is undoubtedly a compelling benefit.
SPAC Merger Overarching Best Practices:
- Choose your team carefully; brainpower over starpower
- Include target industry experts on your team
- Know specifically what you are looking for in a target
- Think of the expectation letter as your foundation - build a strong one
- Invest time and energy into diligent financial reporting
Spotlight SPAC: Churchill Capital IV & Lucid Motors
Scan any recent financial publications and/or website and you will undoubtedly find multiple stories about the deal between Churchill Capital IV and Lucid Motors. This mega example of the SPAC trend closed on February 22, 2021, with great anticipation of investor wealth growth. However, CCIV stock has been faltering, and with its new SEC filing on March 23, 2021, the stock traded down another 8% — investors are uneasy and, subsequently, they are not only reconsidering this deal, but also the SPAC concept itself as a viable investment option.
Some specific history on this CCIV/Lucid SPAC will shed light on the SPAC concept and how it works. Lucid Motors is a luxury electric vehicle manufacturer, originally formed in 2007 by former Tesla executive, Bernard Tse and Chinese and Silicon Valley investors under the name Atieva. Additional funding was later provided by the Saudi Arabia Public Investment Fund, which helped build the Arizona manufacturing facility. Enter Michael Klein’s “blank check” company, Churchill Capital IV, offering to take Lucid public with a combined entry that is estimated to be between $12-15 billion. Klein, formerly a top executive with Citigroup, is a master at leveraging not only the SPAC concept, but also his wide network of influencers...not surprisingly, Lucid’s CEO Peter Rawlinson, a former Tesla executive, is well known to Klein since they worked together on the DuPont Dow merger when Rawlinson was CEO of Dow Chemical. Klein’s network extends further for this Lucid deal in that he has advised the Saudi investment fund, which is a major backer of Lucid.
Early in 2021, the prevailing wisdom was that SPACs would continue to gain popularity throughout the rest of the year, but that mindset is beginning to exhibit cautionary elements. One concern is if there will be enough targets to go around. Already, the Harvard Business Review is predicting the boom of SPACs may soon go bust, and revered Berkshire Hathaway is suggesting the SPAC trend is moving in a negative direction. With these cautionary signals in mind, if you are pursuing a SPAC strategy, robust practices and experts and practitioners must be an integral part of your SPAC plan. An M&A software solution will help you manage your plan and achieve the ultimate extraction of value. Specifically, those platforms that provide ample target identification tools, one complete source of truth for all stakeholders, and relative ease of onboarding are critical to ensuring success.