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When it comes to mergers and acquisitions, 2020 may well be remembered as the “year of the SPAC.” To date, there have been over 230 Special Purpose Acquisition Companies—or SPACs—which have held an initial public offering (IPO) in 2020, raising over $62B of capital in the process. Clearly, the combination of low interest rates, lofty public equity valuations, and a quicker, more cost-effective listing process has proven to be too enticing for many investors and aspiring public company management teams.
From a compensation standpoint, the key considerations in a SPAC deal are similar to those in a traditional IPO, but with a twist. Some of the most interesting dynamics created during a SPAC transaction include:
Given these factors, target company CEOs, CFOs, and HR teams—as well as directors at the SPAC sponsor—would be wise to consider the following questions.
Given the condensed deal timeline, and the parties’ relative unfamiliarity with one another, it can be challenging for the target to communicate, and for the sponsor to fully appreciate, the target’s human capital strategy and ongoing talent requirements. This has potentially important implications for negotiations around equity pool size for the post-merger company. This situation differs from a traditional IPO where venture capitalists and other partners typically take positions earlier in a company’s lifecycle stage and are privy to these strategic decisions much sooner in the process. With “getting the deal done” being of primary concern, human capital and compensation strategy can easily get pushed to the side.
In an ideal world, companies preparing to go public will have ample time to develop a comprehensive pay strategy and structure prior to the transaction. As noted, however, the shortened timeline in a SPAC situation means some degree of prioritization may be necessary. At a minimum, we recommend pre-merger target companies consider:
Pearl Meyer’s research around SPAC compensation is ongoing and trends are still emerging. However, when compared with traditional IPOs, our data is pointing to a lower-than-typical dilution and overhang, a reduced prevalence of evergreen provisions, conversion of pre-merger equity instead of acceleration, and the deferral of defining board of director compensation programs until after the merger.
A potential elephant in the room is the ticking clock which hangs over the SPAC to find a target and complete a merger with the prescribed 24-month timeline. While it’s unlikely to be discussed openly, no doubt there is mounting pressure as time goes on for a SPAC to find and close a deal in the allotted timeframe and avoid unwinding the fund.
While it’s too early to draw meaningful conclusions, intuition says this is a genuine factor which should be considered during the negotiation process. Who needs whom more? Given the importance of human capital strategy to long-term success, we think both sponsors and targets would be wise to move slowly and carefully consider the implications that things like equity pool size can have down the road. For example, from the target’s perspective, a large equity pool gives them greater flexibility to attract and retain using equity. From the sponsor side, however, liberal share usage practices might enable more casual equity spending and increase dilution at the expense of shareholders. Retaining experienced and independent advisors will help both parties think through these decisions to arrive at optimal outcomes.
The SPAC phenomenon is showing no sign of slowing down. With trends and best practices still emerging, engaging those familiar with the process is a must. A neutral party that can remind each side to consider numerous unintended consequences can help better the chances of success. When there is urgency to close a deal, by failing to prepare, you might be preparing to fail.