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Capital Ideas for Private Business

There is a New Game in Town for the Seller of a Middle Market Company

All About Special Purpose Acquisition Companies

By Terry Fick, Principal, Corporate Finance Associates
with the collaboration of other parties in the Capital Markets

While more companies are going from public to private to public, there is a vehicle to create liquidity to the owner of a privately held company by selling his company to a "SPAC" (Special Purpose Acquisition Company). SPACs are public company investment vehicles that differ from the blind pool and public shell acquirers of the past. Some SPACs will target a specific industry or geography, while others will be much broader in scope. Including SPACs that have a pending transaction, there are more than 100 SPACs in registration to go public or are already public. These companies are vying for profitable deals, and are paying cash.

A SPAC is a blank-check company formed to acquire a yet unidentified operating business with cash and or capital stock exchange. A SPAC is created through an equity IPO in which shares and warrants of the blank check company are sold as a unit to investors. Subsequently, the unit trades as a whole until the shares and warrants separate. It is the SPAC's sole purpose to invest the cash it raised at its formation in one acquisition, not a roll up of several companies.

Recently, going public has become increasingly difficult. The size of company it takes to complete a successful IPO has risen several fold. The cost of completing a transaction is much higher than in the past, and the cost of SOX compliance keeps many away. An IPO is also not a good vehicle to bring new liquidity to the owners. The market looks to infuse capital for growth, not to provide the owners with a big payday, so this is not a good vehicle to get liquidity into the ownerís hands. However, since the SPAC is established with the sole purpose of paying cash for a company, and since it is already public, it eliminates some hurdles. Another advantage is that selling a company to a SPAC is not a difficult process. SPACs are highly motivated buyers who pay cash (and can pay stock when appropriate). The SPACís management will receive a considerable reward (approximately 20 percent of the equity at a highly discounted price) if, and only if, they complete a transaction, yet they have only a short time to identify a prospect (18 months from the IPO), so they are highly motivated.

The primary disadvantages of a SPAC as a buyer are: (i) because the buying company is already public and the selling company will be public after the business combination, the SEC is likely to give the transaction documents and public filings heavy scrutiny and (ii) ultimately, the transaction itself is subject to SPAC shareholder approval. The time from signing of the transaction agreement to the close of the transaction can get bogged down in this approval process. Nevertheless, to maximize value for the seller in a broad merger and acquisition process, it is important to consider as wide a variety of competing potential acquirers as possible. SPACs provide yet another important source of potential buyers to evaluate for any transaction.

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Feature Acquisition

Situation: After trying unsuccessfully to complete a management buyout by the President and 25% owner, CFA was hired to make a Transaction happen.

transaction

Result: Working with both owners, CFA was able to bring the right balance of debt and Private Equity to the table to do a transaction favorable to all parties. The resulting value was 60% above what the owners had originally anticipated. They were able to select from four competing prospects. Taylor is a $160 Million company using 300 semiís to transport crude oil from wells to Taylorís pipeline injection points, so the structure had to allow the Cap X of adding new trucks as they grow.

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