Podcast: SPACs Conflicts of Interest and IPO Activity In the Americas

Examining the SPACS boom in the US

Mergermarket & Dealreporter, Head of IPO and SPAC Content, Troy Hooper, joins Julie-Anna Needham to discuss SPACs conflicts of interest and IPO Activity in the Americas and globally in this week's latest episode.

In this podcast, you’ll hear about:

  • What the massive increase in activity be attributed to
  • What proportion of IPOs have been SPACs in the U.S.
  • The pressure for SPACs to find targets and close deals

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks, I'm Julie-Anna Needham. In this episode, we're looking at the SPACs boom in the U.S. I spoke to Troy Hooper, Head of IPO and SPAC content for the Americas. Welcome, Troy.

TROY HOOPER: Hi.

JULIE-ANNA NEEDHAM: Looking at SPAC activity, what have you seen in the first quarter of this year?

TROY HOOPER: Well, this year has been an incredible year for SPAC activity. We've seen more than 300 stocks raise $97 billion in the first three months of the year, and that's a new quarterly record. But not only that, that's more deal volume and number of SPACs that have listed on a US exchange. It's more than all of last year's activity combined. So in one quarter, we equaled a full year's worth of last year's activity, which was also an annual report.

JULIE-ANNA NEEDHAM: And what can that massive increase in activity be attributed to?

TROY HOOPER: Well, I think it's a confluence of factors. Most of all, the US stock markets have been very attractive lately. Fiscal stimulus as well as easy monetary policy with low interest rates have created a climate where public companies are performing very well on the New York Stock Exchange as well as the NASDAQ, and so a lot of companies that are private are choosing to go public, as opposed to raise private capital, because they're receiving higher valuations in the public markets. So that's a big driver.

JULIE-ANNA NEEDHAM: And what proportion of IPOs have been SPACs in the U.S. and also further afield?

TROY HOOPER: Yeah, on the US exchanges, SPACs have accounted for nearly 70 percent of all IPOs in the first quarter, which is obviously a pretty head-turning statistic. And globally, SPACs made up nearly a half of all IPO activity on stock exchanges in the first quarter.

JULIE-ANNA NEEDHAM: So pretty sizable figures. And I mean, it's something-- we've seen SPACs previously, but it seems to be this is the runaway trend of the moment. Looking at the deal or acquisition rate of SPACs, what are those numbers looking like? How successful are they actually doing deals?

TROY HOOPER: Yeah, so there's definitely a flood of SPACs that have entered the market and are out there hunting for M&A targets. And so there's certainly a surplus of these SPACs that are out there. But that said, many of them are landing deals. We've seen more than 90 businesses announce mergers with SPACs in the first quarter, and that's created about $218 billion in combined deal volume.

JULIE-ANNA NEEDHAM: Is that just in the U.S. or is that globally?

TROY HOOPER: Yes, that's globally.

JULIE-ANNA NEEDHAM: Can you talk us through some of the companies that might be using SPACs as a route to market? Because there are some big names out there, and there are also some less well-known companies, aren't there?

TROY HOOPER: There are. We're seeing deals happening across sectors. So some of the bigger names would be SoftBank at WeWork, the co-working space provider. They had previously attempted an IPO that they had to pull when some of their financials were not as rosy as they had originally appeared, but they've sort of reinvented themselves a bit, fixed their financials, and now they've agreed to a deal with a SPAC. And they are expected to go public this year.

Some of the other bigger names would be Lucid Motors, Social Finance, which is a large financial services platform-- it's very popular with millennials and some of the younger generations. And another big name would be Cipher Mining, which is a Bitcoin miner, and that deal was announced earlier this quarter.

JULIE-ANNA NEEDHAM: And I'd like to come on to the protections that could be put in place with sponsors or consideration sponsors in a minute. But what about the risks associated with SPACs? Because it's a much easier route to market for a company. It doesn't attract the same kind of scrutiny as if it was going through the full IPO process. Do investors need to be more cautious about investing in SPACs compared to a traditional IPO?

TROY NEEDHAM: Historically, SPACs were considered more of a second option for companies. It didn't always attract the cream of the crop. It was often some of the lesser-known businesses that would choose that route. But things have changed a bit. Now we're starting to see a lot of top-tier, well-respected, and well-liked businesses that are choosing SPAC route. And that's in large part because we're seeing a whole new generation of investors that are sponsoring the SPACs.

So we have well-known hedge fund managers like Bill Ackman. We have some top-tier private equity firms, like Gores, as well as some venture capitalists and even some investment banks. Even Goldman Sachs has sponsored a SPAC of its own.

So you're starting to see more credibility going into the market. That said, investors should always be cautious any time they're investing in a public market. And the SEC here in the US has actually issued warnings to investors to be cautious about following celebrities into SPACs. There's been quite a few celebrities here who are either sponsoring SPACs or investing in SPACs. So the SEC has warned investors to be cautious around that.

And then there's also some things that investors should keep an eye on. Typically, a SPAC has a two-year time frame to close a deal. So we have seen instances where SPACs have closed a deal in the 11th hour, and those deals have not been looked at very favorably. And at least in one case with this company Waiter-- it's a food delivery company-- it resulted in a class-action lawsuit with the investors claiming that the SPAC did not perform the sort of due diligence that they would have liked. And they also felt like they were slightly misled in terms of the company's business prospects.

JULIE-ANNA NEEDHAM: Yeah. An interest in the delivery in the UK has recently listed in London through a traditional IPO route, and its share price went down quite dramatically, I think, as soon as it listed. So you can have problems either way, whether you pursue the SPAC or the traditional IPO route to market. And you mentioned earlier about sponsors. What should they consider when involved in a SPAC?

TROY HOOPER: Yes. The most important thing for sponsors to do is to make sure that they fully disclose any potential conflicts of interest they may have. So we have seen situations where a sponsor of a SPAC may have an interest in the target company that they ultimately purchase, which may on the surface appear to be a conflict of interest. But so long as they make those disclosures and are completely transparent, legal advisors I've spoken to have said that should be enough to quell any sort of conflict of interest complaints.

Another good thing to do is to instill guardrails in place. And you could do some of these-- some guardrails that the SPACs will consider would be forming a special committee in obtaining a fairness opinion in order to make sure that investors feel as though all the due diligence has been performed and that the deal that's being executed is in their best interest.

JULIE-ANNA NEEDHAM: You mentioned earlier about the company that it took two years to complete. Are you seeing the process speed up more?

TROY HOOPER: Yes, we have. So as you mentioned, the typical time frame is two years for a SPAC to complete a deal, although every deal is different. Some of them only have 12 months. Some of them have 18 months. Oftentimes when they get to that two-year period, they can ask for an extension. But what we've noticed recently is that some of these SPACs are closing deals much quicker than they have historically. For example, there was a SPAC called Northern Star Investment II. It's the second SPAC from the sponsor. And they closed the deal in less than a month after their IPO.

JULIE-ANNA NEEDHAM: Wow. And what about more complicated deals? What about three-way mergers?

TROY HOOPER: Yes, so three-way mergers is a newer trend that we've noticed in the last several weeks. And what appears to be happening there is some of these small to mid-sized businesses that are eager to go public and take advantage of the attractive IPO or public market climate, they are combining in order to make themselves more attractive to public investors and more attractive to SPACs. And since there are so many SPACs out their hunting for deals, it's kind of a win-win because you have these businesses that would like to go public. You have the buyers that are looking for targets. So I think we're going to see more of that going forward.

JULIE-ANNA NEEDHAM: And sounds like it's a good time to be an investment banker. So the SPAC thing has mainly been in the US. In a recent episode, I spoke to Europe's ECM Editor Sofia Cerqueira about how London's looking to get in on the action. How closely do you think other regions are following what's going on in the US to see if there's something there that they could replicate or do you think it will be more of a US-based trend?

TROY HOOPER: Well, last year was certainly more of a US-based trend. But this year we are definitely seeing other regions get in on the action. And I'm certain that many of the investors and advisors in other regions of the world are watching what's happening in the US very closely. And we're really kind of seeing two different things play out in that respect. On the one hand, because there is such heated competition for targets amongst the US-based SPACs, we're starting to see some of these US SPACs look for targets overseas. So a few of those-- in fact, there would be the British online car retailer Cazoo. That is a business that recently agreed to a SPAC deal.

There's even a flying taxi startup out of Germany called Lilium that also agreed to a deal with a SPAC this quarter, or in the first quarter, I should say. And we have other regions of the world, such as in India there is a renewable energy player named ReNew Power that agreed to a deal with a US SPAC. There's an OTT media business called Asian Vision Network that's out of Indonesia, and they've also agreed to a deal with a US SPAC. And finally, an Israeli financial services firm that many investors use for crypto trading called eToro has also agreed to a deal with a SPAC. And then on top of that, you also have some SPACs that are beginning to list on some of the foreign exchanges as well.

JULIE-ANNA NEEDHAM: That was Troy Hooper, Head of IPO and SPAC content for the Americas. Thank you for listening to this week's episode of Dealcast, presented by Mergermarket and SS&C Intralinks. Please rate, review, and subscribe to the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show links. Join us next week for another episode.

26 April 2021