SPACS: eight key issues to consider. Glorious platforms for liquidity and fundraising

A SPAC is a special objective acquisition company. It’s a publicly traded firm set up with the primary goal of buying an working company or other entity. SPACs have several key advantages which might be related with the liquidity and standing of their publicly traded stock, together with: a method of shareholder value realization/shareholder liquidity, an option to use public stock as acquisition currency, a device for compensation and incentive, a method to provide liquidity to shareholders, access to broader financing options and more. And naturally, status! For full disclosure, we may or might not launch a SPAC within the coming months.

In January alone, SPACs completed round $26 billion in share sales, serving to fuel $63 billion of IPO proceeds worldwide this yr, more than five instances the proceeds from January last year. SoftBank Group, Social Capital, The Gores Group, PE agency Thoma Bravo and plenty of others have all raised cash by means of SPACs prior to now few weeks, capitalizing on final 12 months’s file fundraising. Over 200 companies accomplished IPOs in January.

Nonetheless, not all SPACs are equal, and their structures have to be considered carefully given the wide range of parties with a potential curiosity in the equity of any SPAC, including traders, investment bankers, sponsors, acquisition teams, acquisition targets, acquisition target shareholders, institutional funds, hedge funds, speculators, offshore (or even onshore) quick sellers, attorneys, potential lenders and more.

Critical items to consider when evaluating a SPAC at any time embrace:

Stock options or warrant overhang

Stock research coverage

Quantity and liquidity

Shareholder base energy

Classes of stock and sophistication power

Credible institutional holders

Debt and debt power

Need for future financings

Stock Options or Warrant Overhang

A powerful stock price exists when a comparatively broad range of shareholders believes that the stock’s value will appreciate in the future. Thus, when a shareholder chooses to sell his position within the firm, many other shareholders are interested in shopping for the stock. Over the long run, if giant, professional institutional shareholders (such as Fidelity, Capital Group Firms, Vanguard, etc.) are unwilling to or tired of buying an organization’s stock, its value is likely to crumble over time. Some corporations with international consumer name recognition and highly effective brands are able to get away with minimal institutional shareholdings, however they are few and far between.

Company issued stock options, usually speaking, could be dilutive to stock value. In some cases, akin to incentivizing key employees, the facility of an incented workpressure may be mirrored in a powerful stock price. On the other hand, a large number of excellent warrants and options presents key points for stock worth: (1) The dilutive energy of an extreme number of options can’t be overstated. Extreme stock option issuance can cause downward pressure on stock price. (2) Many professional and institutional funds as a matter of coverage will simply not purchase the stocks of publicly traded corporations which have excessive warrant or option “overhang.” This implies that this critical investor base is potentially excluded as a core and strong part of the corporate’s shareholder base.

Ira Kay, a prominent compensation consulting professional, puts it this way: “Extraordinarily high ranges of overhang are bad in bull or bear markets.” A proportion of more than 20 is considered high while 1 to 2 % is slightly low, he says. A very good balance is round 10 to 15 percent. However, there are business variations. The sweet spot for utility or consumer goods corporations is 6 percent, but it’s 15 percent for tech and health care, which includes the biotech sector.

SPACs are, generally speaking, finishing or contemplating bigger acquisitions, in part, as a way to reduce the impact of risks associated with warrant overhang issues.

That being said, it is important to consider these points in conjunction with different factors when making evaluations of SPAC equity. Some corporations with bigger overhang might perform well, especially once they have had a depth of institutional and retail buyers throughout multiple markets or after they have had a smart PE backer.

Potential Options: “Potential” solutions are all subject to regulatory requirements in their respective jurisdictions as well as financial implications that must be reviewed with an investment banker and equity professionals. Finishing a large acquisition might be very helpful. Different solutions embrace providing the issuer with the ability to purchase extreme options, doubtlessly previous to initial issuance. Over time, issuers might also consider using extreme balance sheet money or debt to repurchase overhang options. Issuers can doubtlessly, and topic to regulatory hurdles, work on financial structures that offset extra stock option issuance comparable to potentially issuing offsetting securities topic to regulatory and other considerations. Of course, merging with another public company or going private may be potential options, particularly for those corporations that will battle to boost further rounds of equity. All of these considerations are financially delicate and subject to regulatory obligations within the jurisdiction of the stock market, and thus require strategic consultation with experienced and sophisticated bankers, monetary advisers and lawyers.

Equity Research Coverage

Stock research is a crucial informative or suggestive device in serving to stock buyers form opinions on stock worth potential. Equity research reports are additionally an essential instrument in helping a broad group of traders develop curiosity in and in the end purchase a stock, assuming they agree with probably positive analyst recommendations. Importantly, good stock research attracts lengthy-time period institutional investors, one of many bedrocks of robust, lengthy-term stock worth performance. Stock analysts thus play a critical role in stock liquidity and in the end stock price. Corporations that don’t have any research coverage may be perceived as risky since they might have more limited shareholder bases and more limited liquidity. To use an example that shall be deliberately repeated throughout this writing, imagine watching the 10,000 shares that you just owned yesterday at $10 every have a price immediately of $5 because one other shareholder sold his 10,000 shares for $5 and never a single institutional investor stepped in to purchase on the higher price. What if they did not step in because no equity analysts write research on the company?

Potential Solutions: Firms that don’t have good research coverage should proactively have interaction the financial community with well timed and well thought out communications that designate their strengths (and risks) in a way that is compelling to investors basically, and equity research analysts in particular. Solid investor relations efforts mixed with seasoned and experienced CFOs will be very helpful in this regard.

Trading Quantity and Liquidity

While a separate concern from shareholder distribution, trading volume/liquidity and shareholder distribution are closely intertwined. Many smaller SPACs suffer from a lack of liquidity and trading quantity because of the lack of well-distributed public ownership of their shareholdings and/or a lack of a powerful institutional shareholder base. Stocks with significant volume and liquidity, generally speaking, have better worth stability than stocks with limited quantity and liquidity. The lack of liquidity would possibly doubtlessly be a reflection of a lack of interest in the stock or fears about its stock price. Stocks with limited trading volume and liquidity are thus probably topic to very significant worth swings, and this is the case with some smaller SPACs. This presents the identical challenge because the equity research challenge: imagine watching the 10,000 shares that you owned yesterday at $10 each have a worth in the present day of $5 because another shareholder sold his 10,000 shares for $5 and not a single “buyer” stepped in to purchase on the higher price.

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