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Is the UK hoping for a SPAC attack?

Having seen the explosion in SPAC activity across the pond, it’s not surprising that the London Stock Exchange (LSE) is hoping to woo a few to the UK. Amsterdam has processed most SPACs on European shores up to now, but a recent update by the UK's Financial Conduct Authority could soon change that.

The more flexible regulatory framework means UK-listed SPACs are no longer required to suspend trading when a business combination—or “de-SPAC”—is announced. Market conditions allowing, the review gives the LSE a chance to compete with European jurisdictions such as Amsterdam, which have struggled to process a flurry of potential deals.

Europe is still way behind the US. Of the mammoth US$131.6 billion in SPAC issuance seen in 2021 so far, only US$6.8 billion has taken place on European exchanges, according to Dealogic.

If this changes, then high-growth, high-potential companies need to be prepared before they jump into bed with a SPAC. What do you need to know?

1/ Hit the ground running—there’s a need for speed

Unlike a traditional IPO, which can take 12-24 months, a SPAC merger can take just six months. Speed is of the essence with SPACs, both in their IPOs and once they merge with a target. Think of it as a final round of private funding by a VC fund plus an IPO all rolled into one.

2/ Take the lead on leadership

SPACs are often led by founders and sector mavens that have successfully grown and floated their own businesses on public markets. If you're not purely in it for the money that a SPAC is willing to offer, go deep on your due diligence on the SPAC sponsor team and think carefully about what they can bring to the table to take your business to the next level.

3/ PE firms may be looking for a big promotion

Money matters and management will need to pay close attention to its post-deal incentivisation structure, whether that's rolling over the existing stock option policy or agreeing on a new equity and vesting plan. An idiosyncrasy of SPACs also means there is room for deal targets to push on price if they know the sponsor really wants the deal.

Typically, SPAC sponsors are awarded a 20% slug of equity called a “promote” for a nominal fee. This is as close as one gets to free money and target companies can use this to their advantage, by negotiating the promote down while maintaining the offer price, therefore giving up less equity.

4/ Avoid PIPE dreams amidst many moving parts

Pushing hard on the deal may not pay off, however, and management teams should be wary of the multiple parties in a SPAC, unlike a standard PE deal which involves a single acquirer. Not only do these vehicles have shareholders that can veto the deal by redeeming their capital, thereby shrinking the size of the investment, they also often rely on outside sources of money to backstop the deal. These PIPE (private investment in public equity) investors will be even more important if the SPAC shareholders baulk at the deal. Don't go too hard on price and, for extra security, ensure the sponsor has access to PIPE investors.

Mini SPAC-ing: 2021 London-listed cash shells