British health-tech firm Babylon Health, a telephone and video GP service that supports GPs with AI diagnosis tools, recently listed in New York at a value of $4.5bn.
This was one of a rapidly growing number of overseas acquisitions using SPACs, aka “blank cheque” companies. Hardly a day goes by without a report of another UK or European acquisition along these lines.
This article was written by Simon Burke, Non-executive Chair at Capita, and lead of Transpire’s Financial Services Faculty.
What are SPACs?
SPAC stands for Special Purpose Acquisition Company. These are shell companies that raise money via an IPO (initial public offering) with a plan to acquire a target in a particular industry sector.
They can take companies public as shell companies without going through the traditional initial public offering process. Target companies are then later acquired and merged and made public on the stock market.
The IPO proceeds are held in trust for the acquisition and if a deal isn’t achieved – typically within 18-24 months – the capital is returned to investors. This leaves the sponsors to carry all the set-up costs.
This has raised the concern that SPACs could be influenced to make injudicious investments to get a deal done.
The UK SPAC market
In just the first three months of 2021, 313 SPACs were launched in the US, raising approximately $102bn. And there are believed to be nearly 500 SPACs with more than $140bn in assets raised through IPOs searching for deals.
By contrast, despite the UK’s strength in tech start-ups and university tech spin-offs, there were just three SPACs listed on the London main market or AIM in the first quarter of 2021.
There may be a lack of depth in the UK’s SPACs markets. But this is one reason why companies like Babylon Health are going where the money is when they need substantial funds for significant scale-ups.
In turn, the share number of SPAC mergers in the US in the last 18 months has led to a shortage of US targets. This is driving US funds to seek overseas acquisitions.
Should you join a SPAC board?
The sponsors often populate the SPAC’s board with people who have a successful executive track record in the relevant area to add credibility and expertise to their venture.
If you are an industry veteran you could find yourself approached by a SPAC to join its board. It could be very tempting: SPAC directors gain visibility and valuable new contacts with the sponsor and fellow board members. And, being on the SPAC’s board could be a path to a board seat on the combined Plc board.
So what are the risks and what questions should you be asking?
1. Do you know the acquisition target?
In due course, you could be asked to approve an acquisition of a company for which you have little relevant experience. Were the sponsors just using your name and reputation?
There is already litigation in the US alleging that the directors breached their fiduciary duties by approving a merger. It claims there were “strong incentives to get a deal done – any deal – without regard to whether it was in the best interest of the SPAC’s investors”.
Before joining the board of the SPAC, always enquire about the experience of your fellow directors. Ask yourself if there is a breadth of experience overall to oversee the likely activities of the SPAC.
2. Are the fellow directors committed?
Even if you are confident about the experience of your fellow directors, how do you know that they will be devoting sufficient time to the SPAC?
The workload may appear light at first while the sponsors survey the market for a potential acquisition. But it can ramp up suddenly if you’re asked to approve a deal. Do you have the time to do a thorough review?
3. What if there’s a conflict of interest?
You could find yourself presented with one or more potential targets in which you have a conflict of interest, such as being a recent executive or shareholder.
While you should disclose any conflicts immediately, you also need to consider whether you can remain on the board. The more seasoned you are in the industry, the more likely there could be a conflict with an acquisition target.
4. Have corners been cut to seal the deal?
Even if you’re satisfied that a proposed acquisition is in the interests of SPAC investors, have corners been cut to get a deal done?
If so, ask yourself what unforeseen issues might emerge post acquisition? Remember that these could damage the new combined entity and potentially lead to litigation from investors or regulators.
5. How do you feel about being on the board of a combined entity?
Post transaction, you could be asked to continue on the board for the combined entity. If the target was previously a private company, are the internal controls adequate for a quoted Plc?
- What is the quality of the company’s risk management framework?
- Are key policies and procedures formally documented and reviewed?
- Are you satisfied with the expertise and skills of the combined company board and management team?
6. And what about joining the board of the Plc?
Alternatively, if you’re on the board of the target company you could be asked to join the board of the Plc for continuity or because of your expertise.
Ask yourself, what knowledge do I have of serving on the board of a quoted entity? What training should I undertake?
7. Do you want to be a guinea pig?
The Financial Conduct Authority is currently consulting on making relaxations to the UK listing rules to try to inject new life into the UK’s SPAC sector.
If you’re serving on a UK SPAC board, think about what risks that could expose you to. Are you prepared to be a guinea pig for a new regime?
8. Are you covered by directors and officers (D&O) liability insurance?
Premiums for SPAC directors have skyrocketed in recent months. As a result, some SPACs are cutting back on the amount or duration of coverage and this could leave directors exposed (including for litigation expenses) as litigation increases.
If you’re considering joining the board of a SPAC, remember that it will be something of a leap in the dark. This doesn’t mean that it can’t work out, but conducting your due diligence is even more important than normal.