Startup Exits and IPOs

By pjain      Published July 28, 2020, 6:45 p.m. in blog Startups   


Reverse Takeovers

SPAC IPOs vs Reverse Takeovers (RTO)

A reverse takeover or reverse merger takeover is the acquisition of a public company by a private company so that the private company can obtain public status while bypassing the lengthy and complex process of a traditional IPO.

The transaction typically requires the reorganization of capitalization of the acquiring company. Conversely, the private company can also be bought by the public listed company through an asset swap and share issue.

SPAC IPOs therefore are seemingly similar to RTOs which are already public so RTO were the preferred way to go!

  1. FEES UNNECESSARY. An RTO process usually requires significant transaction fees to lock down an optimal target “shell company”, and may involve additional due diligence fee paid to intermediary agencies; It is like paying greenmail to these shell RTO companies. Frankly today launching a US or EU shell company is very straightforward, filing of paperwork, etc. Costing less than tens of thousands for small or hundreds of thousands not tens of millions for paying RTO transaction fees.

  2. NO CAPITAL RAISING CERTAINTY. RTOs bring little to the table - they are empty shells. Even if a company gets successfully listed through an RTO, it is not guaranteed that it will reach its fund-raising target due to a lack of visibility and structural continuity. Frankly the marketing and upselling to PE's friends and bankers still has to be done in any case. The adoption of a unit trading structure with a combination of common shares and stock options or warrants provides a pathway for a SPAC IPO to inject steady and consistent capital injection into the company that goes public.

  3. UNDERWRITERS HAVE ACCESS TO PRIVATE DATA/VALUATION BENCHMARKS FOR SUCCESS. SPAC IPOs construct blank-check companies from thin air, and sources of capital are from internal PE or from underwriters or "friends". Basically they are lined up to flip the 20%+ in appreciation in this "private" IPO.

  4. RTOs eg Chinese Shells can have HIDDEN TRAPS.

    In absence of a comprehensive due diligence process, an RTO process could also be extremely risky in that the “shell company” might have covert debt and legal obligations; these risks, on the other hand, are absent in a SPAC transactions since the “blank-check company” cannot utilize any capitals raised during the SPACs other than the acquisition of a target company.

---- Special Purpose Acquisition Company (SPAC)


A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. They are also known as "blank check companies."

Investors in SPACs usually start with well-known private equity funds as being blank check - there is no indication what they will invest in. Only the promoter's reputation backs the value of funds put in.

These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated. A SPAC generally has two years to complete a deal or face liquidation. In some cases, some of the interest earned from the trust can be used as the SPAC's working capital. After an acquisition, a SPAC is usually listed on one of the major stock exchanges.

Timelines and Evolution

Blind Pools of 1990s

SPACs have been around for decades first created in the 1990s, an outgrowth of a far riskier vehicle popular in the go-go 1980s: the blind pool. Some blind pools were created and dissolved without making a single investment, leading to the eventual creation of the SPAC, the blank check company, which has tighter controls.

Reverse Mergers of 2000s

For Chinese companies NASDAQ reverse mergers still dominated and SPACs were little-known.

In recent years, SPACs went mainstream, attracting big-name underwriters and investors and raising a record amount of IPO money

  • In 2019 $12.1b with 59 SPACs.

  • In 2020 now a raft of blank-check acquisitions made huge waves with the Robinhood crowd. By end July 57 SPACs already raised $21b+ in IPO, so will beat 2019 record with 5 more months to go! In 2020, more than 50 SPACs have been formed in the U.S., as of the beginning of August, raising some $21.5 billion.

    • Virgin Galactic Holdings SPCE
    • Nikola NKLA
    • DraftKings DKNG
    • Bill Ackman $4 b Pershing Square Tontine Holdings PSTH.UT
Year SPACs fundraise $b
2016 $3.2b
2019 $21.2 59 SPACs
2020 $21.5 - by July end 2020 alone in 57 SPACs


The biggest protection of SPACs over older blind pools is that 1. Stronger reliance on WHO is running the SPAC - reputation is CRITICAL! 2. In exchange for not knowing what company will be acquired, investors have the option at the time an acquisition is announced to decide to hold or redeem the initial investment at cost (plus accrued interest).

PEs SPACs get HIGHER profits over selling to another PE

Selling to a SPAC can be an attractive option for owners of a private company which are often private equity funds.

Terms CAN BE DICTATED in seller's favor as technically it is an arms length transaction. Commonly SPAC selling can add up to 20% to the sale price compared to a typical private equity deal.

Faster EXIT/IPO at 1-4 vs 9-12 months

Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment.

Less Strategic Top Talent needed and less disruption of PE-company operations

  • PE-owned "OPERATIONS" are often robotic, automated restructuring e.g. divest XYZ assets, reduce costs (layoffs)
  • PE-owned private companies strip away an entire layer of CXO costs - the very high salaries, stock options and other bonuses of a few CXOs/VPs,etc.
  • Consequently the top layer of PE private companies are usually less
  • Limited interruption of Company Management or Higher level "Strategic" Talents required

OPACITY, Lower Due-Diligence or Public Disclosures

CERTAINTY of Pricing early

  • There is very limited risk from fluctuating market conditions

Way to FINANCE at better terms - PE firm can extract more of its CAPITAL out of about-to-be-SPACed firm

CHEAPER IPOs - Save 10%+ in Investor Banker Fees

  • It is claimed that typical SPACs can be done at 5.5% underwriting - but this would include new bridge, and other financing.
  • If private company is really turned around and doing well, the need for new financing is not likely


Overall Returns have been poor - 4%, underperform SPY

On the average SPACs have failed to live up to the hype — the return so far this year is a bit over 4%. * Only a few outliers have had huge gains.

“During the 1-month and 3-month periods following the acquisition announcement, the average SPAC outperformed the S&P 500 by 1% point and 11%, respectively, and beat the Russell 2000 by 6% and 15%, respectively .. However, the average SPAC underperformed both indexes during the 3, 6, and 12-months after the merger completion" - Goldman report

Blank Check RISKS

SPACs are risky plays in general.

Buying into a SPAC is a bit like buying a house without knowing the neighborhood or the style of architecture. Instead, you hand your down payment to a real-estate agent to pick a house for you, sight unseen, with the option to get your down payment back if you don’t like the house. If you go that route, you better trust your real-estate agent. Trusting Apotheker to make an acquisition, though, is like purposefully choosing one whose claim to fame was buying “The Amityville Horror” house. --

REPUTATION Matters - Horror Stories of Bad M&A and SPAC leaders

  • Burgundy Technology Acquisition led by HP's Leo Apotheker and SAP James Mackey as co-CEOs seeking to raise $400 m.
  • But Apotheker at HP - HP paid $11b for U.K.-based data analytics software company Autonomy. Many court cases and leaks about the process have shown that Apotheker was at the center of all of the problems. Even after HP's CFO complained about unjustified lofty price, Apotheker overruled her and pushed forward.
  • But in his court testimony, Apotheker admitted that he had not even read Autonomy’s most recent financial results before signing the deal, which lawyers pointed out would have taken him about 30 minutes .. but "I was running a $125 billion company" and indicated he was too busy to do the work.
  • Autonomy had a well-known (at least to bloggers and analysts) of a history of aggressive accounting tactics. has been accused of misrepresenting its financial performance by slipping hardware sales onto its balance sheet while selling itself as a “pure-play” software - thereby getting a far higher PE than it deserved.
  • Many senior H-P executives that Apotheker wasn’t right for the job, which lead to his dismissal just 35 days after the Autonomy deal was announced.
  • UK is a pretty inbred system run by investment bankers, "City", and top politicians and its court system is yet to rule on Autonomy.
  • He was replaced by Meg Whitman and HP wrote off 8.8b and later settled many shareholder lawsuits.
  • It seems foolhardy to give him a blank check to have another try - at little risk to himself!

Process Flow of PE-acq to SPAC-IPO to Harvesting in Public Markets

PE Firm hunts for distressed assets

Due Diligence - Internal Proprietary Thesis and Modeling

Negotiates terms that make it worthwhile

PE firm Stabilized Private Company, Divested, Tuned up

Preparation for SPAC-ization - Year(s) of Audited Clean statements

PE Firm sets up SPAC with its initial funds, and with "Friends" Capital raise

Acquisition of Private company

Gradual continued Fund-raising from more "public" banks and institutional investors

The adoption of a unit trading structure with a combination of common shares and stock options or warrants provides a pathway for a SPAC IPO to inject steady and consistent capital injection into the company that goes public.

Opening up to public After the acquisition

SPAC is then thrown open the general public, that is when the share value gain occurs.

SPACs have two years to complete an acquisition or they must return their funds to investors.

Harvesting in Public Markets : Later appreciation, Gradual Divesting

Cases of SPACs

TIMELINE : Recent 2020 flood of SPACs

Virgin Galactic SPAC ($SPCE)

A much-hyped space tourism company and high-profile recent deal was Richard Branson's Virgin Galactic.

Venture capitalist promoted by Chamath Palihapitiya whose SPAC Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for $800 million before listing the company in 2019.

However July 2020 things are much worse off. Virgin Galactic SPCE reported no revenue in the second quarter and again delayed its first trip to space for founder Richard Branson, while announcing that it will dilute its SPAC investors by issuing another 20.5 m shares.

Ackman's SPAC

Bill Ackman a HF owner his own SPAC, Pershing Square Tontine Holdings, the largest-ever SPAC, raising $4 billion in its offering on July 22 2020.



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