Originally published 13-May-2021 on LinkedIn
SPACs and SPAC-like transactions (reverse mergers) have been around for years, but SPAC activity in particular has grown immensely in recent years.
No surprise that rapid growth in forming companies with blank checks inevitably draws in less savory characters. Many SPACs started employing celebrities and star athletes (ARod, Serena Williams, Shaq, Jay-Z, Ciara Wilson, to name but a few) to boost SPAC values and get through a transaction more rapidly at higher valuations so founders can sell high and move on.
Much of the mania has passed, however, and many of the more dubious SPACs actually trade for less than the value of cash on hand.
Amidst this drama, why would a private company still seek to become publicly traded this way?
There are plenty of serious SPACs out there doing serious due diligence on serious targets. The right SPAC offering to take a private company public can provide several advantages compared to a traditional IPO route:
Serious SPACs have experienced managers who make the process easier.
Upfront capital has already been committed - the SPAC has funds in trust with PIPEs on the sidelines ready to commit more.
Deadlines are set to close the deal. This part is often criticized, but from the target’s standpoint it’s attractive to know by when a deal has to close.
Valuation expectations have more time to play out. In a traditional IPO, your target price changes constantly until right before the IPO, and even then you don’t know until IPO Day 1 whether your underwriters screwed you over. I’d argue SPACs (legitimate ones like LSAQ) give target companies much greater predictability and comfort as to their valuation, since the valuation is set initially and has several months to play out before shares actually trade on the closed deal.
No free lunch though for the target company- the SPACs take their cut. In LSAQ’s case, the sponsor company that formed it holds over 2 million “founder’s shares” for which they paid $25,000...total...i.e. ~$0.01 per share (common in nearly every SPAC). Those shares are worth $10/share once a deal is closed. The realization of these shares on closing nets a massive gain and effectively dilutes all other shareholders.
I noticed Science 37 helped mitigate this dilution on current Science 37 shareholders by negotiating an earn-out whereby current Science 37 shareholders are issued up to 12.5 million in additional shares if the stock eventually trades up to $20/share within 3 years. The combination of $1b+ valuation and additional earn-out potential is a highly attractive proposition for any company, especially in the contract research business.
I hope this helps explain, at a high level at least, why a private company would be attracted to going public via a SPAC merger. I’m fascinated by the Science 37 deal because most industry SPAC deals I’ve seen are on the biotech side, while the contract research companies have gone the traditional IPO route...until now.
Will this start a trend? I think it will. The deal terms are quite favorable to the target company. An unprofitable company is being valued at >$1b, while solidly profitable CROs have recently sold for far small valuations.
How does that valuation make sense? More on that tomorrow…
Disclosure- I have no financial interest in any company mentioned in this post. This post reflects my thoughts and opinions on publicly available information, and is definitely not investment advice!
