How CXOs can Overcome SPAC Deal Complexities in Five Steps

In the first part of this article, I discussed the rise of SPACs and how — and why — it is fast becoming a preferred route for companies to raise funds. In this part, I cover the challenges that SPAC deals bring and how the C-Suite can overcome them.

With SPACs, companies can expect to go public in about three months compared to 9 – 10 months for an IPO, a typical merger or acquisition. But SPACs are complex because they’re a combination of a merger and a public IPO. This situation may be further complicated by a carve-out when the acquired company results from a divestiture from a public corporation. Here are five things CXOs can do to overcome complexities arising from SPAC transactions.

1. Be ready to meet more stringent regulations
Companies looking to debut in an IPO or SPAC need to ensure that they are adequately prepared to meet more stringent market regulations. In the lead-up to a SPAC, investors will be paying close attention to a company’s potential for growth and increased revenue. Accurate budgeting and forecasting will be critical for a successful IPO, as the market allows little room for error and punishes companies for significant underachievement.

Tip: Assess your financial and operational processes and supporting systems carefully to ensure readiness for public scrutiny.

2. Get your financial house in order. And do it on the double.
Companies going public will need to restate their financials with more detailed information at their segment and product level. While this may sound simple in theory, it isn’t straightforward in practice. A study of 400 global finance leaders found that companies spend only 18 percent of their time strategizing or communicating results to the business or public. Finance is supposed to help the company uncover insights; this cannot happen when the finance team is burdened with creating the reports and reconciling bad data between multiple systems. Additionally, maintaining and syncing data between various data sources is a nightmare, which impedes quality reporting. It is also easier to manage these financial processes in a deal with a private company than a carve-out entity, whose financial and accounting functions must be separated from its parent.

To meet these demanding reporting requirements, companies will need to review their financial processes and reporting technology to provide not just reporting but also value-added analysis. CXOs should assess the adequacy of their financial analysis and reporting infrastructure and improve control, communication, and accountability. Moreover, a smart and efficient close-to-report cycle will also create a foundation for evaluating performance and supporting business decisions.

Tip: Focus on control, accountability and first-time accuracy instead of speed alone; often, focusing on speed can result in a close cycle, followed by a series of post-close adjustments and rework.

3. Adopt data analytics capabilities
Establishing consistent definitions and common data structures provides a foundation that can significantly reduce the time spent collecting information, reconciling data and understanding variances. Building the Management, Discussion and Analysis (MD&A) Report is a manual process. It involves accessing multiple copies of data in different siloed systems, scanning multiple copies of the financials in parallel, and manually identifying variances and causation. AI-driven Business Financial Automation of manual activities and streamlining information flow can improve quality, consistency and timeliness.

Tips: Seek workflow and data collaboration tools and services that can help with financial planning, reporting and analysis.

4. Secure your SPAC
Companies that are going through a public IPO or SPAC are subject to vastly increased security risks by hackers looking to influence the target's market value. A private company or carve-out’s existing systems and processes will often prove inadequate for its future as a public company. Conversely, companies being spun out from larger enterprises might face the opposite problem: scaling down from more complicated tools and processes. Moreover, companies built through acquisition often face challenges of disintegrated systems and questionable data quality. Having a robust cybersecurity assessment and monitoring infrastructure will be critical to ensuring a successful SPAC debut. In any of these cases, processes need to change before new tools are installed — preferably a year or more ahead of the carve-out, SPAC merger or public launch.

Tip: Assess your cybersecurity risk and monitoring infrastructure both during and after the transition to the target state entity.

5. Let IT lead the way
CXOs should be proactive in assessing the current environment and identifying what is needed to support a more agile and digital world, especially since SPACs and DPOs move swiftly. Preparation is the key to success, and this will help ensure a smooth and efficient execution process.

During the acquisition of a private target by a special purpose vehicle, the SPAC acquisition sponsor may be reluctant to prioritize IT and operational systems since the new capacity may not be needed for many months. Corporates who are divesting an entity that is eventually acquired by a special purpose vehicle may also be reluctant to prioritize IT. But it is important to remember that the divestiture lifecycle and the “Value Realization Curve” are different. Sellers who intend to maximize the carve-out sale value to the SPAC buyer need to support the buyer with a meaningful separation plan and cutover framework in advance. Also, in such corporate carve-out-driven SPACs, the sellers’ responsibility is only beginning, not ending at the divestiture close; one of the most important components of future value is working with the SPAC to optimize the future entity’s cost structure and operational effectiveness. While the finance and operational processes in a mature business line may be more advanced compared to a private startup target, the methods and systems may be more intertwined with the seller. They may need more effort to separate and transition to the SPAC. Both corporates and private entities who are looking to sell to a SPAC must:

• Examine assumptions in their TSA and gain agreement between all parties on costs and operational models;
• Conduct detailed planning to understand what needs to be transitioned to the buyer and how the buyer will support the proposed target state model; critical decisions include what will be supported by the buyer on Day 1, what must be started net new or stood up or cutover;
• Consider impacts to employees — attrition is a critical risk and impacts future SPAC value. Employees undergoing such a difficult transition are amongst the most resistant to change, so CXOs must lookout for potential organizational challenges that may deter SPAC success.

Tip: Recognize IT as integral to the process, and since IT projects are lengthy and expensive, plan early and align your IT to the target state design while assessing the adequacy of the current state — this will ensure you have one less thing to worry about once you go public!

Learn more about our consultative approach and how to simplify your approach to Mergers, Acquisitions & Divestitures.