Special purpose acquisition companies (SPACs) are quickly becoming the hot trend in the financial world. These investment vehicles are appealing to financial firms looking to invest, and to companies looking to raise capital, raise their profile, and attract industry heavyweights to their leadership team.
But what are SPACs, and what do data center companies need to know as the trend begins to make its way into the digital infrastructure space?
What are special purpose acquisition companies (SPACs)?
SPACs are shell companies that list on the stock market. These ‘blank check’ companies have large amounts of capital and the specific aim of merging with an operating company. In short, investors group together and fund (also called sponsoring) a SPAC which then goes through an IPO. That SPAC finds a target (known as an operating company) merges with it, and it becomes a "deSPAC."
Operating companies get to avoid the high fees and lengthy steps of the usual IPO process and the SPAC investors get a large equity slice of the newly public deSPAC. SPAC financing can also be supplemented with additional capital through Private Investment in Public Equity (PIPE) to cover the additional capital.
Though first introduced in early 1990s, SPACs have only recently become a major tren. In 2020, 248 SPAC made IPOs - more than the previous 10 years combined. 2021 has already seen almost 300 SPAC IPOs raise close to $100 billion. This is driven in part by market volatility in the traditional IPO process coupled with low interest rates.
Up until 2021, the data center industry had largely avoided the SPAC trend, with most mergers being in adjacent industries such as telecoms, semiconductors, batteries, software, IoT, and energy.
Vertiv was an early example of data centers merging with SPACs; the company listed on NYSE via a merger with GS Acquisition Holdings Corp in late 2019 (see box below). But 2021 has already seen Cyxtera Technologies and quantum computing startup IonQ both announce billion-dollar SPAC mergers.
“We always wanted and expected to be a public company, because of the scale of our platform,” Cyxtera CEO Nelson Fonseca told Data Center Frontier. “We were on the path to an IPO later this year, but Starboard’s interest accelerated our ability to go public. We found a great partner.”
There are a number of other SPACs hunting for acquisition targets in the digital infrastructure space. The likes of Power & Digital Infrastructure Acquisition Corp and Prime Impact Acquisition I, lead by former Western Digital execs Michael Cordano and Mark Long, are actively looking for targets in the world of data centers. At the same time, the likes of Conx and Cerberus Telecom Acquisition II are hunting in the telecoms sector. There are also a number of real estate SPACs on the horizon from the likes of CBRE and Benchmark Real Estate Group that could see data center companies as a potential target.
What does a SPAC merger bring to the operating company?
The most obvious and most immediate benefit for operating companies looking to merge with a SPAC is the money and the timelines in which that money can arrive.
“The faster timelines, reduced pricing risk, and the opportunity to work with experienced management teams make the vehicle a viable exit option,” says Merlin Piscitelli, Datasite Chief Revenue Officer for EMEA.
SPAC mergers offer companies an additional way to to obtain late-stage growth capital in lieu of Series C, D, and E funding rounds and away from through private equity or venture capital financing (though many of the same players are funding SPAC vehicles).
“The problem was the serial financing is you're constantly constrained with your opportunities by the round of financing you just did,” says Randy Pond, CFO at edge computing startup Pensando. “With the SPAC, the big advantage is you can sell the potential whereas if you wait for an IPO you can only talk about historical financials.”
“It's become less treated as an alternative to an IPO and more treated as an alternative financing arrangement, because it generally brings a lot of money to bear very quickly.”
Pond says the fact a company will only have to negotiate with the SPAC and the sponsor of the PIPE on the valuation, meaning you can avoid IPO roadshows and you're less at the whim of the underwriter.
Speed of transaction is also a boon. The process is quick: it can take around six months to go through a SPAC merger, significantly quicker than a traditional 12-24 month IPO process. Olympia McNerney, Goldman Sachs’ head of US SPACs, told Bloomberg that SPACs are bringing the last round of financing forward to the same time as the IPO. “Companies are effectively doing the last round and the IPO all in one go,” she said
Chamath Palihapitiya, founder of the Social Capital venture capital fund, told Barrons that because of the faster time to market, SPAC mergers are a particularly attractive alternative to IPOs for founder-led growth tech ventures.
“You can also sit down with potential owners of your stock, give them a multiyear forecast, and talk about how you want to build the company over the next five to 10 years,” Palihapitiya said. “And the founder gets enormous flexibility in designing their board, lockups, and more. All of these things will create an enormous market for SPACs as the primary vehicle that tech companies [should] use to go public.”
Fame and fortune await post-merger?
Rob Brown, founding partner, CEO, Clearthink Capital, says there is “a tremendous amount of notoriety and publicity” around going public generally, and something that is increased if the company is going public through a SPAC merger.
“It's a wonderful way to get your name out; Other than people involved in the EV space I don't know that anyone heard of Nikola before it went public, now it's difficult to find someone who hasn't seen the name.”
As with all cash injections, the added capital means companies can expand more quickly and accelerate development plans, but at a scale that might be harder to accrue in private funding rounds.
“There's no question that it does tend to accelerate development and commercialization,” says Brown. “Most of them suddenly find themselves with a very substantial amount of capital, which has tended to lead to more aggressive expansion plans, more, more extensive commercialization.
“The effect is probably the same if someone was getting that money in the private context, it’s just difficult to obtain the sort of large aggregations of capital in the private context.”
SPAC leadership can be a boon to a smaller company
Some SPACs are broadly focused, happy to merge with any company they think will provide a good return. However, many are focused on merging with companies in specific industries, and are led by industry experts and alumni to ensure the right target is found.
Ex-Telecity CEO Michael Tobin is reportedly looking to launch his own SPAC, while former CyrusOne execs Gary Wojtaszek and Kevin Timmons are both part of the leadership team for InterPrivate IV InfraTech Partners Inc. Western Digital execs Michael Cordano and Mark Long, Dish founder Charlie Ergen, and Timothy Donahue are all involved in SPACs, while telecoms alumni Craig McCaw led one SPAC to merge with rocket manufacture Astra, and founded another shortly afterward.
While some SPAC leaders will happily move on post-merger, many will stay and join the boards of the newly merged organization. The potential to add industry expertise and authority to a company’s board and leadership is one of the main appeals for companies.
“One key specific advantage of going the SPAC route, especially for TMT [technology, media, and telecoms] companies, is the ability to work with an experienced SPAC management team,” says Datasite’s Piscitelli. “Once the merger has been consummated, the operating company will be able to lean on many years of experience these dealmakers bring to the table, including building and executing a successful growth agenda.”
On the flip side, the influx of ‘celebrity SPACs’, including ones led by former NBA star Shaquille O’Neal and former NFL player Colin Kaepernick could be a sign that the market is over-hyped, and would only appeal to a company looking for capital rather than expertise.
“Shaquille O'Neal is now a SPAC sponsor,” says Pond. “What does that bring to the table besides being able to raise money? That would not be somebody I would be interested in.”
What companies need to look out for in a SPAC merger
Law firm Freshfields has created a list of 20 items private companies should evaluating when considering whether to be acquired by a SPAC. These include questions over equity, timelines of deals, capital and company structure post-merger, board makeup, as well as compliance issues such as where a company will be domiciled.
“If the objective is purely the capital, focusing on the structural aspects of the SPAC would probably be the most important thing to look to,” says Clearthink’s Brown. “What is the warrant coverage that is outstanding, who are the investors, was this SPAC centered on your space or not, etc?
“If the objective is not necessarily just the capital to try to supplement your team, obviously looking through the various people who are involved with the SPAC, who are in management are on the board of directors, looking at the pedigree of those people and their qualifications to see how well they would supplement the team.”
The quality of the investor should be considered. If the SPAC merger is supplemented through Private Investment in Public Equity (PIPE), Pond says the quality of the PIPE is something that should be looked at.
“What I would want if I was looking for a merger is a PIPE that has a buy and hold mentality; you want somebody who has a long-term view with or your potential in the market,” he says. “It's incumbent on the target as much as it is the SPAC to do their homework about who they're merging with.”
Companies considering mergers may be reassured, he says, by the fact that large financial companies such as Goldman Sachs, KKR, BlackRock are moving into the SPAC space: these are not ‘pump and dump’ investors previous SPAC bubbles were often rife with.
Speaking to EE Times, Achronix’ CEO Robert Blake said that when talking to different SPAC companies prior to its $2.1 billion merger with ACE Convergence Acquisition Corp, some weren’t a good fit because they didn’t have domain knowledge.
“[ACE Convergence Acquisition Corp.] was a good fit because they understood the space that we’re in and what we’re trying to do, the customers that we’re going after, the markets and applications,” he said. “They would much more likely understand our story than some of the other SPACs out there that could be really quite diverse and not in the technology space.”
Operating companies need to be ready to be a public company
There are inevitably risks attached to merging with a SPAC company. While it might accelerate the timelines of a stock market float, merging with a SPAC does not remove the ongoing requirements around reporting, audits, and dealing with investors. It is important to be ready for life as a public company - perhaps more so since there’s less time to prepare.
“The company in question may just not be ready to go public due to the lack of internal audit or financial reporting required by the SEC,” warns Maxim Manturov, Head of Investment Research at Freedom Finance Europe. “This is a crucial issue that, if applicable, should be addressed early with appropriate auditor advice.”
“While the SPAC timelines are often accelerated versus the traditional IPO process, there is still a great deal of due diligence that needs to be done,” adds Merlin Piscitelli, Datasite Chief Revenue Officer for EMEA, “not only between the SPAC sponsor and the targets, but also amongst outside investors who may come in to supply the capital necessary to make the deal whole. For the SPAC, going public still requires a great deal of readiness and preparation.”
“Another risk lies in too much effort, time, and legal expenses related to SPAC negotiations, in case the shareholders do not approve of the deal. Finally, if the outlooks presented by the company are not coming true, there is a possibility of a legal action being taken by the investors.”
For companies that choose SPAC mergers instead of traditional IPOs many of the key requirements will likely already have been met. But for younger, pre-revenue startups still in the R&D phase, the increased accountability may come as a shock.
“Being public overnight is not easy especially for some of these guys who don't have commercial footprints,” warns Pond. “There are things that come with this; you need an investor relations person, a financial reporting person, an SEC attorney.”
“You have got to take a hard look at yourself and say, ‘Do I have a management team that will scale with this much money? Am I going to stand up under the scrutiny? Have I ever worked in a public company? Can I get SOX compliant in 12 months?’ The business has to go through a lot of change quickly, but it's a playbook that's pretty well known.”
Clearthink’s Brown acknowledges the negative aspects of being public are principally related to the regular filings and disclosure procedures required to remain compliant, but they also include the fact you can’t hide behind the veil of being a private company.
“You can no longer present to the public as bigger than you are,” he says. “As a private company, you have a tremendous amount of latitude as to how you portray yourself. In the public company context, you lose that freedom because all material information has been released to the public, good and bad.”
“As a private company, if something goes wrong, you may have a discussion with your small group of private investors, in the public context that something goes wrong and you're announcing to the world that something has gone wrong.”