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Chairman’s Message – March 2021
By Mark Herndon, Chairman of the M&A Leadership Council 

Over the last two years, special purpose acquisition companies (SPACs) have dominated the IPO market. According to BusinessInsider, 219 SPACs raised $73B in new IPOs during 2020 alone. Historically, these entities have looked to either tech unicorns (large, fast-growth private entities) or highly disruptive early-stage technologies as their principal acquisition targets. Since sponsors only have two-years to “de-spac” by acquiring an operating entity or be forced to liquidate the cash raised at IPO back to investors; and with a historic number of new SPACs now post-IPO,we speculated early last year that SPACs may ultimately look to corporate carve-outs as a meaningful SPAC acquisition TargetCo.

That was mostly speculation until the February 23, 2021 announcement that publicly traded packager Ardagh Group SA had agreed to sell its beverage can unit to a SPAC led by financier Alec Gores. This is a significant development that warrants serious consideration and a skillful approach by potential corporate divestors. Let’s look more closely at this type of opportunity from the corporate seller’s viewpoint.

In our April 2020 study, 23% of skilled corporate acquirers anticipated buying divested business units during late 2020 and 2021. Other studies have speculated that Boards and corporate executives at between half to two-thirds of corporations will turn to divestitures in the next 12-24 months to strategically reposition their businesses, raise cash for accelerated growth in core technologies and business lines and pay down debt.

Any seller’s objective is to maximize their valuation proceeds. In a real sense, this means more than just selling to the highest bidder. To fully maximize value, divesting executives seek the best buyer with the best long-term capital structure; and the best team/capability to ensure the strategic focus and execution ability to accelerate the go-forward business’s growth. Consider how SPACs are now poised to emerge as a highly desirable counterparty to a corporate divestiture.

  • The best buyer with the best long-term capital structure. In addition to their IPO proceeds, most SPACs have additional committed capital sources known as PIPEs (private investment in public equity) from large institutional investors. A deal with the right SPAC can provide a capital structure equipping the operating company to invest for growth and acquire other companies without seeking new investors or structures.
  • The best team/capability to accelerate growth. Many SPACs want to acquire experienced management teams and enable them to maintain significant control and growth incentives. The combination of the right team, intense strategic focus, and capital to grow is often the best remedy to unlock hidden value and growth in corporate assets that may have languished under the shadow of more dominant corporate business units.
  • A second bite at the apple. An equity recapitalization is a common private market play to enable a selling principal or founder to raise growth capital, take some proceeds off the table, and at the same time maintain a significant equity stake of the go-forward business. SPACs may often provide this same type of a second bite at the apple for divesting corporate sellers. For example, with many de-spac transactions, including cash and stock in the post-IPO SPAC entity, selling corporations can realize upside growth potential, then liquidate that position over time, or exit that business entirely in a subsequent sale.

There are other advantages, such as having an experienced management team that already understands how to operate a public company with the requisite regulatory compliance and reporting required. But there are also other challenges well known to the M&A Leadership Council Alumni that have been through our training program, The Art of M&A® Divestitures & Carve-Outs. See related webinar replay link here.

  • The divestiture lifecycle and “value-curve” are different. Sellers intent on maximizing sale value must work early and diligently to prepare the business for sale but support the buyer with a meaningful separation plan framework in advance. Likewise, the Seller’s fun is just beginning – not concluding - at transaction close since one of the most significant challenges is optimizing the remaining business’s cost structure and performance.
  • The transition services agreement (TSA) is both typically necessary and challenging to develop, cost, gain agreement on and administer to an expedient and satisfactory exit without turning to hand-to-hand combat between the parties.
  • Highly intertwined and complex corporate shared services. Since the business to be carved-out is typically supported by complex, intertwined services, systems, processes and data operated and retained by the Seller, these services must ultimately be replaced, outsourced or reinvented by the Buyer as quickly as possible post-close. Doing so requires detailed planning and a clear understanding of what is transferring over in the transaction. It must then be operated by the Buyer at Day 1; what must be started “net-new” or “stood-up” by the Buyer; or otherwise “cut-over” within an acceptable, but limited timeframe, and in a way that ensures full business continuity and no disruption.
  • Employee Engagement.  While no acquisition is easy from an Employee Engagement and Experience perspective, and attrition is always a key risk, expect employees in divestiture-originated carve-outs to be among the most at risk and change-resistant. Be on the look-out for a range of potential emotional, psychological, and organizational change challenges such as the perception of “being the loser” and fears of a subsequent sale.

Done well, however, divesting a corporate carve-out to a SPAC may now be another avenue to unlock hidden value in corporate assets. As executives continually evaluate their entire portfolio of businesses, SPACs may now in fact become a preferred buyer for scalable assets that are currently overlooked by analysts and investors, underperforming, or non-core to the overall corporation and just not “moving the needle” on overall corporate valuation and earnings. Given the potential to reap both cash and equity consideration at sale, along with a renewed strategic focus, growth mandate, and long-term capital structure – we suspect more corporate sellers will soon join these ranks.

See you at an upcoming event!

Very best regards,

Mark Herndon
Chairman, M&A Leadership Council