SPAC’s are one of the most popular investments today and have overtaken the IPO market as of 2021. When a company goes public through a SPAC, the overall process is very similar to a merger. Although there are similarities between the two, the de-SPAC process has a few unique differences from a standard merger. Let’s take a look at the de-SPAC process, what makes it unique, and how it differs from a merger.
- A de-SPAC transaction is the merger of the formed SPAC with the company they plan to acquire
- Managing members and public investors in the SPAC vote to approve a merger
- The de-SPAC transaction agreement outlines the conditions, regulatory rules, and operating agreement following a merger
What is a de-SPAC Transaction?
As you may already know, a SPAC is an acronym for a “special purpose acquisition company”. They are formed with the intent of pooling money together to acquire a company in a target niche.
A “de-SPAC transaction” is the merger of the formed SPAC with the entity they plan to acquire. For the de-SPAC transaction to occur, it must be approved by the shareholders within the SPAC. There are many actions that are needed to be taken in order to complete the de-SPAC process.
How Does The de-SPAC Process Work?
Once the managing members of the SPAC disclose the company they plan to acquire, public investors will vote on whether or not they approve the merger. The sellers of the target company can receive either cash, equity, or some combination of the two. If they vote against the merger, two things can happen.
- The sponsors and managing members of the SPAC can look for another company to acquire
- The SPAC will be dissolved and the investor’s funds will be returned to them plus interest
If they vote in favor of approving the merger, the official de-SPAC process will begin. Shareholder approval must be obtained with official SEC proxy rules. SPAC investors still retain the right to opt out of an approved deal by redeeming their “units” if they don’t fully agree with the deal. As such, there is a formal de-SPAC transaction agreement that will contain all the relevant regulatory information for investors.
The de-SPAC Transaction Agreement ( Part 1 )
The transaction agreement contains important information about the merger and what rights are public investors have. In addition, it also includes rules managing members of the SPAC have to follow. Some of the information contained in the transaction agreement include:
- Regulatory rules under the SPAC agreement
- Shareholder consent for approving the transaction
- Any third party consents
- Certain cash thresholds that must be maintained
Prior to the deal closing, the SPAC managing members will outline and arrange the necessary financing structure for the merger. This can include a combination of debt financing and equity financing.
The de-SPAC Closing Process ( Part 2 )
The closing process of the de-SPAC transaction allows public shareholders to redeem the shares held in the trust account. This is a pro-rata amount that is equal to the IPO share price. After the merger has closed, the target company is converted to a publicly traded entity and its trading ticker symbol is subject to change. Four days after the merger has closed, the management team must submit Form 8-k with the SEC.
This form is a report of the events or corporate changes that will occur as a result of the merger. The form is required by the SEC if a significant change takes place within a company. The form will disclose some of the following information:
- Details of the de-SPAC transaction
- Current company reports
- Financial statements
- Material changes as a result of the merger
The closing process is critical as it will change the overall structure of the company. As such, it needs to be carried out by seasoned professionals.
Different Types of de-SPAC Transactions
Depending on the target niche and target company, the management team may decide on a different type of de-SPAC process to take. Whatever transaction type the management team ends up using, all the relevant details will be disclosed in the transaction agreement.
Below are some of the different types of de-SPAC transactions that may take place.
- Merger and Acquisition ( most common )
- Consolidation Amalgamation
- Business Reorganization
The most common is a merger and acquisition. It tends to be the most straightforward and isn’t as complicated and cost-intensive as the other two options. Consolidations and business reorganizations are commonly done if a business is struggling and there is significant upside in the deal.
How Long Does The de-SPAC Process Take?
The de-SPAC process timeline will vary based on the complexity and size of the deal. The whole SPAC process may take anywhere between 12-36 months. On the other hand, after the official investor voting has taken place and the de-SPAC process should take no longer than 6 months.
This can however drag out longer if there are complexities with financing the deal and larger than expected redemption made by investors.
What is a de-SPAC PIPE?
Most de-SPAC transactions are accompanied by an additional PIPE transaction. PIPE is an acronym for “private investment in public equity”. PIPE transactions are added to the de-SPAC deal to bring in additional investor capital that may be needed for the deal. This is because sponsors and management may need to raise more money than they received during the initial IPO process to fund the merger.
The PIPE investors are usually offered company shares at a discounted price. They can include hedge funds, mutual funds, municipalities, and institutional investors.
Another reason they are brought in during the de-SPAC process is to limit the risk associated with shareholder redemptions. The investors that are brought into the de-SPAC PIPE process are accredited investors. Often times it can also be the original investors who have decided to inject additional money for the deal to be better capitalized.
As you can see, SPAC deals and the de-SPAC process can carry quite a bit of complexity, but they are the new and preferred way of funding mergers. The the success of the de-SPAC process is based on managements experience and how well they have done their due diligence of their target company.