Embracing New Dynamics in Public Markets

In this section:

• Making Sense of SPACs
• Anticipating the Demands of Activist Shareholders
• A Premium on Preparation

Emerging risks around digitalisation and ESG are not the only issues complicating the deal landscape. A combination of factors – from the PE boom, to more rigorous and more widely varying disclosure requirements, to post-transaction litigation – are making public markets harder to navigate. Adding to this complexity is a revival of shareholder activism. Crusading shareholder groups are making their influence felt in areas such as ESG and shaping corporate decisions on whether and how to engage in M&A transactions.

Making Sense of SPACs

A surge in SPAC activity in 2020 and much of 2021 turned what was traditionally a dual-track M&A process for would-be sellers (both direct sale and IPO) into a triple-track process. And, while appetite for SPAC transactions has declined sharply of late in the US, there remains cautious interest in them in Europe, according to Natasha Good, Global Co-Head of Tech, Media and Telecoms at Freshfields Bruckhaus Deringer. “In light of the US experience, European investors are keen to test the model’s attractiveness as an investment vehicle, albeit there’s a pause right now,” she says. “There are also significant funds in US SPACs which have yet to be deployed.” Engaging with SPACs can involve unfamiliar risk for deal participants, however, particularly in the private-to-public mergers (or ‘de-SPACs’) prevalent in the US and which are starting to be tested in Europe. For example, the impetus to effect a de-SPAC within the investment time limits imposed on the SPAC can result in due diligence on the de-SPAC ‘target’ being hurried, such that material issues are either unidentified or not properly assessed. This, in turn, can potentially impact the SPAC’s ability to comply with the rigorous public market disclosure requirements applicable to it as a listed entity. The intense time pressure to close deals or hand back money also poses governance challenges, says Andrew Ballheimer, Senior Advisor, Aon EMEA M&A Advisory Board. “Governance in SPACS can, depending on the circumstances, be fraught with conflict issues for this reason,” he says. Regulatory initiatives to align SPAC listing standards in different markets should help address some of the governance weaknesses. The UK’s Financial Conduct Authority (FCA), for example, updated its rules for SPACs in July 2021, with the intention of strengthening investor protection, while also creating more certainty for SPAC sponsors. According to Ayuna Nechaeva, Head of Europe - Primary Markets at LSEG, the FCA’s rule changes are already having the intended effect: “Since the rules came into effect, we’ve seen an increase in interest from SPAC sponsors, and our SPAC pipeline is good. In my view, greater alignment with other global markets – balanced with good governance ‒ creates a positive environment for both UK and international SPACs to list in London.” Sellers should not expect an easy ride from SPACs when it comes to disclosure. If anything, says Good, the disclosure expectations when a SPAC is involved are more exacting than in a straight IPO. As publicly listed entities, she explains, SPACs face their own pressure to disclose as much detail as possible about a potential deal. Rothschild’s Adam Young notes that PE firms often invest in SPACs through Private Investment in Public Equity (PIPE) vehicles, and PIPE investors, he says, increasingly require IPO-like disclosure as well.

Approaching SPAC-Readiness: Combining Selected Risk Transfer and Advisory Capabilities at Various Points in the Process

Source: Aon, Hybrid thinking for SPACs, 2021.