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Sink or Swim for SPACs? Financial Communications Strategy Is Critical to Success

by M&Co. Staff

The special purpose acquisition company (SPAC) market generated considerable buzz in investment circles in the first quarter of 2021. US$100 billion of capital flooded into over 300 SPAC IPOs year-to-date, according to SPAC Analytics. There have been some very high-profile success stories with big names and huge returns that attracted attention and pushed SPACs further into the mainstream. The top three performing SPACs to date—Primoris (PRIM), Betterware (BWMX), and DraftKing (DKNG)—have all delivered unit returns upwards of 600% for shareholders.

But the honeymoon period of SPACs is now over. In April, deals dropped by 90% as some heat came out of the market, after the SEC indicated that it was preparing for a regulatory crackdown. Growing media and investor skepticism around the transparency of SPACs and the quality of deals is making it more difficult for SPAC sponsors to navigate a path to success. Going forward, SPAC sponsors will need to work harder to attract capital for deals, and central to achieving this is having a strong financial communications and media relations strategy.

A Record-Breaking First Quarter

SPACS are sometimes referred to as “blank check” companies and are created with the sole purpose of using proceeds raised from an IPO to finance a yet-to-be-determined M&A target. In particular, SPACs have recently targeted high-growth tech companies that have the potential to generate big upside growth in share price for investors.

SPACs mitigate some of the traditional risks of an IPO, such as pricing volatility, and offer a faster way to take a company public. In some cases, a company can go public in 8—10 weeks, versus a year or more for a traditional IPO. Investors who participate in SPACs receive warrants as part of the IPO process, which they can choose to redeem once the acquisition company has been identified. They like that SPACs give them early access to start-ups and gravitate to those sponsors that have a good track record of identifying interesting opportunities.

While the SPAC structure has been around for more than two decades, it has grown tenfold just in the past five years, and the average capital raise per offering is also rising. According to SPAC Insider, the average IPO size in 2021 is $325.1 million versus $195.1 billion in 2015.

SPACs Battle Competition—Critics

However, the capital that investors are pouring into the space is a double-edged sword. The market is increasingly crowded, which makes it difficult for new entrants to attract investor capital, as well as find optimal investment opportunities. As a sponsor, it can be challenging to communicate how your SPAC is differentiated, and to avoid being sucked into the negative news cycle. Having a financial communications plan and an investor relations communications strategy in advance can help you to proactively avoid some of the risks.

The frothy market also is stoking a backlash of criticism from skeptics, including the media and investors, which is further fueled by examples of SPACs that have failed to perform to expectation. New entrants that monetize celebrity names, including sports icons like Shaquille O’Neill, are raising questions about an SPAC bubble.

The concern is compounded by scrutiny from the SEC. The agency announced new guidance that warrants issued to early investors might not be considered equity instruments but, rather, liabilities for accounting purposes. According to a Bloomberg News report, that move could disrupt filing for new SPACs until the issue is resolved. And some believe there could be more regulations ahead.

Creating a Compelling SPAC Story

In this challenging market environment for sponsors, a strong investor relations and financial communications strategy is fundamental to the success of an IPO or acquisition. Some of the basic criteria that can help SPACs rise above the fray are:

  • A leadership team with proven experience in a particular field
  • A strong vision of what you want to achieve with the SPAC
  • Acquisition targets that are financially sound
  • Proven technology, existing revenue streams, and a demonstrable market opportunity
  • A clear path to profitability

It is equally important to convey this information to investors in a clear and compelling way.  Sponsors needs to think carefully in advance about creating a suite of well-produced marketing and investor materials that convey a compelling investment thesis. This, coupled with an effective media relations strategy that seeks out prime opportunities with reporters specifically covering SPACs, makes it possible to differentiate your SPAC IPO or acquisition from the litany of those that have failed. (or litany of failures).

Some of the basic components to create in advance include the:

  • Roadshow deck that clearly demonstrates your investment thesis, supported by market data and forecasts
  • Website landing page for the SPAC that is easy to navigate and contains relevant information
  • Press releases announcing the IPO and subsequent acquisitions to create a steady stream of content
  • Investor call and video presentations (scripted and either pre-recorded or recorded day of the announcement) that build investor confidence in your management team

Navigating a Frothy Market

Aligned with this, your investor relations communications strategy and financial communication strategy needs to be proactive in mapping out potential risks. Critically important is avoiding potential missteps of providing information that could be construed as misleading, which could draw regulatory review and create a hostile environment of disgruntled investors.

Although SPACs may be less regulated than other investment structures—at least for now—it doesn’t mean that companies can be any less vigilant about compliance. The fact that the SEC is paying more attention to the industry is a sign that there could be a bigger crackdown ahead with more rules and guidelines governing the sector to protect investors.

Montieth & Company has first-hand experience leading financial communications on successful SPAC acquisitions, including the recent proposed business combination by Rice Acquisition Corp. (NYSE: RICE) with Archaea Energy and Aria Energy, which saw the stock trading up by 50% on the first day and consistently sustaining its stock price in the month following. In addition to advising on the roadshow deck, website, and press materials and organizing the investor call, we secured coverage of the announcement by Bloomberg and Forbes through targeted media outreach under embargo. Our multi-disciplinary approach to investor relations, media relations, and marketing communications was critical to the success of this SPAC.

Very often, the story doesn’t end there. It’s important to continue engaging with the media and investors in an investor relations strategy on an on-going basis to add support to the newly acquired companies. We recommend a calendar of announcements going forward, a consistent series of media interviews that highlight the value of the underlying businesses, and events that elevate your executives as thought leaders in investing and the industry sector where you are making acquisitions.

When it comes to developing and announcing an SPAC IPO or acquisition, sponsors need a media and communications plan that will navigate the risks and clearly differentiate a deal from other SPACs. For more information, please contact us or check out our Financial Communications expertise.