Making SPACs work

Q&A: Making SPACs work

An interview with Mandi Simpson and Bill Watts

Listen to the audio version of this interview

According to the latest figures, more than 400 special-purpose acquisition companies (SPACs) are now in the market seeking private firms to acquire and take public. 

In this edited transcript of the “Financial Executive Podcast,” Mandi Simpson, a partner, and Bill Watts, a principal, both with Crowe accounting advisory, discuss how financial executives involved with a SPAC transaction should plan for and think about these unique vehicles.

Financial Executives International (FEI): What do you think prompted the interest in the growth in SPACs in 2020?

Mandi Simpson: A big appeal of SPACs is that they’re a fast way to get access to capital. We saw a lot of capital activities being sidelined, a lot of investors with excess liquidity looking for a place to invest. And so, the confluence of those events has made this option appear a little bit more attractive recently than the activity that we saw in prior years.

Bill Watts: I have a very similar view. I think that companies coming into and out of this pandemic really see a lot of opportunity as they continue to grow and see that opportunity to provide value to the market and look for ways to kind of accelerate that. 

This is new and different for us as well as those in the investment environment in terms of these IPOs. I think this kind of initial market volatility caused a lot of IPO activity to grind to a halt early in the pandemic. And a lot of it had to do with the fact that companies just really couldn’t get out there and make offers or talk about themselves to the public. And then, I think as the pandemic got moving, companies started to learn pretty quickly how to operate in this environment.

Those that operated very efficiently and saw a lot of growth opportunities really kind of outshined those in the market that were struggling, and I think the environment started to see that there was a lot of opportunity there. And so I think that caused a ripple effect through the industry in terms of companies starting to realize, hey, there is still a life in this market and we can seek and look for opportunities to grow through these equity events. 

I also think the presidential election that came last fall and into early this year caused a lot of anxiety and concerns for companies. And so, typically things slow down near the end of an election year, but it just seemed like the activity changed and didn’t really slow down but accelerated, especially, as Mandi mentioned, there was this quicker avenue to get into this type of investment.

I would say in the short term or midterm, I don’t really see this slowing down. I think you continue to look in the press and the market and see SPACs and these blank check companies forming rapidly. And as you know, they have to quickly go out and acquire within 24 months of them becoming a public SPAC. And so I think you’ll continue to see a lot of aggressiveness in the market over at least the next 24 to probably 48 months.


FEI: Are there any industries that you see taking advantage of SPACs more than others?

Watts: As I alluded to earlier, I think companies that are newly formed or fast growing in this environment and saw a lot of opportunity in industries related to consumer consumption – so those that were able to distribute and get things to consumers quickly – saw a lot of growth opportunity. 

And it tends to be not so much a specific industry but more maturity of companies. So you continue to see many startups, though that may be related to the tech, and a lot of them tend to be associated with technology. I say that’s still a pretty hot market where you see a lot of SPAC activity. But we see it across all industries, though it tends to be, once again, with those more startup companies that are aligned to high-growth, high-potential areas that really were not harmed or hindered by the pandemic.

FEI: What are the top things middle market companies have to keep in mind if they’re going to be involved in a SPAC transaction?

Simpson: You’ve heard us talk about one of the benefits and why SPACs have been so popular is the speed at which the deals get done, and so that’s very attractive. But that speed is really a blessing and a curse for executives that may be involved in those target companies that would be acquired. When you’re going through a traditional IPO process, it is more drawn out, which means you have more time to do all of the things that you need to do to get ready for becoming a public company. In these SPAC transactions, that time frame is very, very compressed.

So you’ve got to keep in mind, still asking your questions, are we ready to become a public company? And what are the things that we need to have in place to be able to get to a point where we can be a public company? Because that access to the capital, it comes with a lot of requirements. That could be new accounting standards, additional disclosures – just a lot more effort involved, certainly at the outset. But definitely even on an ongoing basis, just the maintenance of those procedures requires a lot of effort. So, are you ready to make that commitment, put that stress on your people, get the additional talent you need to be able to move forward in that space?

FEI: Where exactly in the finance unit do you need a lot of that help? You talked about disclosures. Or is that across the board?

Simpson: I would say it’s across the board. 

I mean, when I think about the things currently in play here as we sit in 2021, if you’re going through a SPAC transaction, there are some big accounting standards out there that you probably haven’t adopted. If you’re going to become public, you’ll likely need to accelerate your adoption of the lease standard, of the credit losses standard, if those are impactful to your organization.

And Bill and I have shared stories about revenue recognition, which nonpublic companies have adopted already. But the audit scrutiny that’s going to be applied for revenue recognition as a private company versus a public company is likely very different. And so do you really have all of the accounting policy documentation and information that you need to be able to go through that process?

But that’s just a small piece of the accounting. There are also your SEC disclosures – so that’s going to be putting together your MD&A, your significant risks, all of that quarterly and annual reporting requirement that’s going to be significantly higher. And throughout the organization, your internal controls over financial reporting are now also going to need to be upgraded and documented and receive an additional level of scrutiny. That’s really quite pervasive and not just, oh, that’s something that accountants do. That’s something that everybody’s going to need to adapt to.

Watts: And I might just add to that, we’ve worked quite a bit with companies that are being acquired by SPACs, and we really find that most, if not all, of them run into three main challenges. Do you have efficient resources? Because it is a lot more work, and especially in the accounting and reporting requirement area. So we find that companies typically aren’t ready for this because they don’t have enough resources.

Two, of those resources, they normally don’t have the right expertise or the competency. Most private organizations tend to not have many people on staff that have worked at public companies or have experience doing public company reporting, as Mandi’s alluded to.

And three is establishing that governance and internal control framework she mentioned as well. Many organizations, once again, either haven’t formalized that or don’t have the expertise or knowledge of how to go through that. And becoming a public company is a life cycle. You go through many stages. And as Mandi alluded to, it gets compressed very quickly with going through a SPAC. And so a lot of times these are layered on top of each other where you can’t really spread them out very much, so it causes more stress and challenges and therefore the need for these resources and changes.

FEI: If I’m an owner or a finance person in a private company and it looks like I am going to be involved in a SPAC, what are the two main things I need to be concerned about right off the bat? I mean, how do I get prepared for that?

Watts: I can start first because this is what we help companies with. I mean, first is sitting down and educating both the CFO and the executives of the organization – not only the CFO but the CEO and if there’s a COO and chief legal counsel and HR – all these individuals have to understand, as Mandi alluded to, it’s going to impact all of them. So it’s giving them an education of what the process will look like, what it entails, what type of investment and resources you’ll need, and a time frame. And then it’s really developing that finance kind of framework. And it’s really specific to your organization and how you’ll ensure that there’s a complete, clear, and controlled implementation.

It’s not just ensuring you get everything done, but you have a road map so that you’re under control, you’re organized, and you’re implementing this at the right pace. And your auditors are going to be involved with this – your external auditors – and they’re going to want to see this and understand that you’re moving at the right pace as well. 

There are a lot of parallel paths going for the CFO. Not only do CFOs have to understand the framework, the road map, and how it’s going to roll out, but they’re also dealing with stakeholders, external auditors, and potentially regulators, depending on the industry they’re in, and really being impacted by their work as well. Because as you know, you have to potentially go back and restate prior year financial statements under public company standards, where you may have had those audits done under private company standards in the past. So, as we alluded to earlier, there’s a lot of rehashing or creating documentation in that regard.

So I think creating this kind of road map framework is essential, as is starting to align your resource support to that. And so is understanding how we are going to get this done by these milestones or timeline, and what resources we need, and what that entails. And once again, it’s not just the number of resources but the type of resources, not only across finance and accounting, but it many times is IT, could be operations, depending on, once again, the type of industry.

As Mandi and I work together very closely, then the next step would be understanding the complexities of accounting specific to your business, because not every business will have the same type of complex accounting transactions or items on their balance sheet that they have to deal with. And there are many different nuances that private organizations didn’t really have to be concerned about, that now under public company scrutiny will change quite a bit in terms of detail, form, and interpretation.

So there’s a lot of these things that go into this road map. And so I think for a CFO facing this environment, education and a formalized time frame and foundation approach will be very critical and help ensure success down the road.

Simpson: When you said, what are the two things you needed to do, my first thought was, it’s kind of hard to say what are the two things, because there are dozens of things. But I think Bill did a really good job of framing that – that the key is you’ve got to have everybody onboard and you’ve got to have a really good plan. Because there are going to be lots of parallel work streams, so you need to figure out where are the gaps? Where might you need to employ some additional resources to make sure you can meet the aggressive timelines?

FEI: These is an aggressive timeline with these structures, but there are complex accounting issues. You are going from 0 to 60 in a lot of ways in understanding. How do you prepare the finance staff or get them that transition of adapting to this new way of accounting for things?

Simpson: That’s the role that we are brought in to play, especially if companies don’t have somebody on their staff with a public company reporting skill set, they may just need to bring in some outside help to kind of orient them around the different requirements. But it really is dependent on each individual company, because again, the credit losses standard may be really big for another company and revenue recognition may be meaningless, and the opposite could be true at a different company. So it’s really important to just sit down and kind of figure out what are your big rocks? What are the differences between what you’ve done under private company standards and public company? And map out what that plan of attack is going to be.

Those are the things that are on your balance sheet and on your income statement where you’re dealing with – kind of figuring out – your historical accounting operations and what may need to be changed, but there are other nuances associated with the SPAC transaction itself that can be really complex. So you’re figuring out who’s going to be the accounting acquirer and what that means for actually accounting for the transaction. Figuring out how you’re going to do pro forma disclosures, because there’s a lot of complexity associated with how these deals work and how the equity may work in the deal. So there are just a lot of additional nuances from an accounting perspective that you’ve got to sift through and make sure you’ve got that complete list together so that you’re working from a comprehensive playbook as you’re figuring out how to get things done.

FEI: From the accounting side and from the operational side, what do you think the landscape is going to be like this year for SPACs? 

Simpson: I think the accounting issues likely aren’t going to change significantly. I mean, it may be slightly different accounting standards, slightly different nuances. But for accounting and financial reporting, there’s nothing really new and additional coming down the pike, so I think that those challenges will remain the same. But from an operational or logistics perspective, Bill, I know you said that you expect the activity to continue at least for the next 24, maybe even 48, months. I suspect you don’t think that the pace and the to-do list are going to shorten any over that time period.

Watts: If you just look at the number of SPACs that are out there, it’s a pretty simple view or calculation, because as I’ve mentioned, SPACs have two years to, we’ll say, spend their money, acquire a company, however you want to explain it, or they have to revert back all their funding to the investors and dissolve being a public SPAC. So, a lot of times it’s a rush or it’s a race to the finish line for these SPACs. And so there are a very large number of SPACs still out there operating in that two-year time frame. So we see those still out there actively pursuing, and will probably continue to pursue, because they don’t want to dissolve and basically revert back their funding. They want the opportunity to raise equity and value from their investment. So that’s why I said, I think for at least the next two to three years, there’ll be a continuation of this. Could it slow down? Possibly, if the market starts to change and SPACs, we’ll say, fall out of favor, and companies realize that it’s more advantageous to go through a traditional IPO model or not go public at all.

Maybe acquisitions of each other will be more from a private perspective. But I truly believe that we’ll still see SPAC activity, as I mentioned, for at least the next two to three years, just because they’re there and they have activity. The interesting thing I will note is that SPACs in general, when they form, they have to basically as part of their investment talk about what industry they might focus on. And what I always found interesting was if you follow these SPACs and their activity, the majority of the SPACs do not acquire in the industry they think they’re going to focus on or what they claim is going to be their area of expertise. We’ve seen a wide variety of crossover. And I think a lot of that has to do with the fact that they have this limited time frame and that there are a lot of opportunities quickly materializing across a lot of different areas – as I said, no one industry.

So I think we’ll continue to see that. And that might be an area where companies have to understand that, though SPACs may say that they’re going to specialize in a specific industry, I think in the end, they’re going to look for the best opportunity for themselves as well as the organization. So I think, if a company feels it’s in an industry where it doesn’t see a lot of SPACs forming and focused on that, I wouldn’t readily feel that there are not opportunities out there for you, because as I mentioned, we’ve seen a majority of SPACs focus on companies and acquire companies that aren’t specific to the industry they originally formed around.

Have questions about the best choice for your organization: IPO or SPAC? 
This Q&A with Mandi Simpson, a partner, and Bill Watts, a principal, both with Crowe accounting advisory, regarding how financial executives should think about SPAC transactions was recorded for the "Financial Executive Podcast" in January 2021. The conversation has been edited for brevity and clarity.

Contact us

Mandi Simpson
Mandi Simpson
Partner, Accounting Advisory Leader
William C. Watts
William C. Watts
Managing Principal, Consumer Markets