Special purpose acquisition companies, better known as SPACs, have been around for decades, but experienced a resurgence in late 2019 when entrepreneur Sir Richard Branson chose this route to take his space tourism company Virgin Galactic public. Since then, they have risen in popularity, but have been faced with increased criticism in recent times, which has been related to how they are assembled and the investor reactions that have been observed.

The much-debated question in the market at present is whether SPACs are being misused and overly inflating the potential value of companies that are not ready or even organised to realise such growth? And is this because they have failed to assemble an execution-minded management team and/or because they have not mapped out a robust and creative strategy that builds credibility and trust in the company?

A little more about SPACS

With a SPAC transaction, a private company becomes publicly traded by merging with a listed shell company; the SPAC. SPACs are an alternative to the traditional IPO route and push the business into the public listing space at a faster pace. As a listing route, it is also more cost effective.

Why has the popularity of SPACs increased in recent times? Because you negotiate the pricing with the SPAC before the transaction closes, as opposed to your IPO price depending on market conditions at the time of listing. If the market is volatile, a SPAC provides a lot more certainty surrounding price.

However, as mentioned above, in recent times SPACs have hit the press in a less than desirable way. This is due to investors ‘cashing in’ before a number of public listings, subpar management teams and SPAC founders or sponsors, who are typically given a 20% ‘promote’ of the shell’s company more or less for free – which is for their efforts in finding a target company, not being particularly motivated to find a company because they received the shares for free and will cash in regardless. On a more positive note however, there appears to be a new generation of SPAC vehicles emerging, that each are backed by a more accomplished group of sponsors who are better able to find attractive merger targets.

The positive outcomes

Listings using SPACs have led to many companies realising their growth ambitions and financially being deemed successful over the years. One example is sports betting site DraftKings, which originally merged with a SPAC called Diamond Eagle. Diamond Eagle had already raised USD 400m in its share sale, and then at the same time as announcing the merger with DraftKings, it announced that Fidelity Investments would lead a group of funds buying another USD 380m of new stock. After the merger, and despite spending USD 200m in cash to buy another company, it still had more than USD 500m on its balance sheet and a resulting value of USD 2.7bn.

The not so positive outcome

Media company Buzzfeed went public not so long ago by merging with a SPAC. Its share price immediately spiked by 35% but then closed down 11%. Buzzfeed expected to raise just USD 16 million from its offering, because days before, 94% of the USD 287.5 million raised by the SPAC was pulled by investors. This was reportedly due to investor distrust in the company’s plans.

Enhancing the investor reaction to a public listing before it happens

Should the process of going public using a SPAC, which has been likened to writing a blank cheque, be bolstered – pre-listing – with a strategy that builds credibility and trust in the company, as opposed to it simply being a numbers game? One tactic that SPACs could look to adopt is to develop a brand strategy, which will explore and decide on the brand story, its messaging, the company vision and go-to-market strategy from day 1 through to day 365. A brand strategy also has the ability to bind together the management team, who is then organised to go in one clear direction; the investors, who can buy into the vision, but also understand how it will be executed in the short- and long-term; and the general public, who has the power to make or indeed break a business that is about to be listed or newly listed with speculation on social media, and who is often forgotten during the listing process.

Some may wonder why you would opt to spend precious budget on a brand resource prior to a listing, but the difference it can make is nothing short of transformational. Imagine if someone paints you, as an investor, a vision that addresses societal or environmental issues, or taps into much needed diversity in a saturated market, or simply tells you a story with robust evidence to back it up and in a creative way that appeals to your senses. Then, you will engage much quicker and on a deeper level if you resonated with their story, than if you were given a standard investor deck presentation, and on the front, it featured the words ‘Invest in a company that will sell innovative HealthTech products and disrupt the technology sector around the world’, to give one example.

Not forgetting the hero and the villain; social media

Whilst we are on the topic of branding and all things marketing, it is worth considering the role that social media plays during the SPAC process leading up to a public listing. Social media has the power to not only build a brand and accelerate its growth, but also to hinder the growth of a business through social media speculation. If a message appears in clusters, investors are understandably inclined to start digging for the truth. Even if they cannot find what they need to confirm or disprove the message, it will plant a seed that will impact the share price through investor behaviour.

“Given the speed at which a bad rumour spreads on social media and the still evident bad press surrounding SPACs, any company looking to go public via a SPAC should be willing to ‘join the conversation’ on social media to clarify any concerns about the company and quash the fast-spreading nature of speculation leading up to the listing date.”

Lauren Marks, Brand Strategist, OMNIA Global

To conclude, the takeaway message for us as a business and the one that we want others to be mindful of is that companies going public using a SPAC need to inject strategic creativity to not only help elevate the entire process, but also help bind the management team, the investors and the general public. With a robust brand strategy as described above, there may actually be a reduced risk of social media speculation and people ‘filling the gaps’, but the management team should still be willing to communicate beyond their target investors and to think more long-term, when it comes to communicating the brand to the wider world.

Want to hear more? Please take a moment to listen to our CEO, Daniel Hansen, impart his view on SPACS as part of a succinct round-up of topical issues that entrepreneurs have to be mindful of when growing their businesses and ultimately taking them public. Click here to listen.