SPAC Investor Relations: Similar Visibility Challenges, More Complicated Execution
The recent surge in Special Purpose Acquisition Company (“SPAC”) transactions has not gone unnoticed here at The Alpha IR Group. SPAC IPO issuance hit an all-time high in 2017 with over $13 billion raised, surpassing the previous high of $12 billion in 2007, and an average of $3.1 billion over the past decade. What was previously considered an unorthodox method to raise capital is now gaining the attention of more established banks and larger institutional backers. This approach can provide a faster, lower-cost listing process, but it does not reduce the importance of having an established, organized Investor Relations (IR) program. In fact, it increases it. In this brief, we provide some key considerations, both for companies currently going through a transaction and those preparing for one.
On February 15, 2018, The Alpha IR Group sponsored and presented at “The SPAC Conference,” an event that brought together key market players and provided a forum to discuss major trends and potential challenges in the space. This high-quality event included a day full of speakers, panels, and Q&A sessions on a variety of SPAC-related topics. Alpha IR’s Senior Managing Director, Steve Calk, addressed the event attendees on the panel entitled, “Transitioning from a Blank Check to Operating Company.” Steve shared our history of helping companies increase investment community visibility during complex transactions, including IPOs and M&A deals, and discussed Alpha IR’s recent consultations with SPACs on their transitions to trading as an operating company.
Unsurprisingly, we found that many of the concerns held by SPACs and their investors centered on the ability of the newly-formed company to communicate with their key stakeholders, gain credibility as an operating company, and reach new, longer-term oriented investors. In an effort to help frame the IR conversation for SPACs that are going through a transaction or preparing for one, we compiled a set of key themes and takeaways from the event.
To see an overview of “The SPAC Conference” and its full agenda, click here. To view a replay of all of the speakers and panels, click here.
- Broadening the Investor Base. To survive and thrive in the post-deal world, SPAC-related companies will need to engage with new shareholders that are less interested in the transaction and more interested in the long-term vision and operational efficiency of the company. This issue was a consistent theme of the event, as many companies have struggled to move on from their deal-focused investors, including event-driven hedge funds. As Steve Calk of our team noted during his panel discussion, competition for investment capital has never been greater. For a young company to compete effectively, and win that competition, the average management team of a small- to mid-cap company will spend 275-300 hours in 2018 engaging with existing and new investors via non-deal roadshows, investor conferences, calls, and other time-consuming engagement forums. SPACs have to be prepared to take on this challenge if they want to gain the attention of these more conventional investors, mutual funds, pension funds, and family offices. Sophisticated, consistent engagement with the investment community is critical to maintaining a fair valuation through the first two years of post-deal operations, and will also set the tone for longer-term valuation expectations.
- Soliciting Sell-Side Coverage. Broadening the company’s visibility on Wall Street is an essential focus for management and IR teams well before the completion of the transaction to an operating company. This includes identifying and obtaining sell-side coverage in an increasingly difficult environment created by dramatic competitive challenges and new regulations that are beginning to affect sell-side economics globally. Understanding how the sell-side works and being ready to support the firms and their analysts with banking opportunities and access to management remains critical to attaining and maintaining coverage. As Calk noted in his remarks, “…attaining sell-side coverage is a process and takes strong relationship building. Directors of SPACs need to understand that they are not executing a traditional IPO. As a result of the untraditional nature of the SPAC model, the company is likely to be underfollowed during its first two years as a public company. Therefore, until proper coverage can be obtained, SPACs should plan to supplement their investor outreach with internally-driven initiatives, which can be supported by expert resources such as Alpha IR Group.”
- Driving Visibility Through an Investor Day. Elevating visibility on the Street is often most effectively accomplished by hosting an Investor Day. These events are critical components of being an operational, public company as they provide a unique setting for the buy- and sell-side to gain comprehensive insight into the operations, segments, and end markets of a business. It also provides an opportunity for the Street to meet and interact with leaders across the organization in an environment that cannot be accommodated by traditional investor conferences or roadshows. As Jamie Mendola of Pacific Grove Capital emphasized in his presentation, hosting an Investor Day in the immediate months after deal-close is an unparalleled way to garner visibility, and is a great way to say to the Street, “we’ve arrived.”
- Developing Roadshow Strategies. The universe of sell-side analysts is shrinking. This has ramifications on all companies, but particularly on smaller companies and SPACs. It is incumbent upon the management team and its IR department to drive its own roadshow strategy and buy-side targeting. This task of connecting with the buy-side to drive visibility, traditionally reserved for the covering sell-side analyst, will likely be an internal responsibility, at least until the company gains a broader following. Ensuring high-quality meetings is the easiest way to be sure that management garners the highest possible return on time invested during planned travel days.
- Managing Guidance After Deal Close. One of the most important ways to reinforce management credibility is accurately guiding and forecasting business operations and then achieving those objectives in the first few quarters as a trading, operating entity. This is not an easy task for SPACs given the new structure of the business, but with a limited sell-side, and a hedge-fund oriented buy-side, effective use of guidance is critical to managing Street expectations. SPAC companies will need to think creatively and conservatively guide their key operating forecasts to maintain both the credibility of management team, and the confidence of the investor base. One unique feature of the SPAC structure that will affect guidance is the number of warrants tied to each unit share of the SPAC post-deal. Outstanding warrants are effectively future dilution, and their presence needs to be effectively communicated, especially when guiding to per-share metrics. If companies cannot efficiently guide their business, it conveys a perception of mismanagement and incompetence, ultimately leading to the orphaning of many SPACs before they are able to prove out their business strategy.
- Messaging. Transitioning from a blank-check company to an operational company contains numerous strategic initiatives, of which few are more important than the need to clearly communicate with the Street and message the company’s value proposition to investors. Effectively conveying your vision and strategy to the Street begins early in the deal cycle and carries through to every future Street engagement. These crucial engagements include: earnings releases and calls, non-deal roadshows, investor conferences, non-earnings press releases, and even other less structured interactions with the Street. Ineffective messaging campaigns can create messaging gaps, which can create management credibility issues and, ultimately, a poor valuation. To avoid the common messaging pitfalls, it’s critical to prepare, rehearse, assess, and refine your message routinely. It’s our experience at Alpha IR that a proactive effort from day one, combined with an external party’s assistance to provide constructive feedback and continual message assessment, leads to the type of feedback that ensures your message resonance and effectiveness is maximized.
- Shareholder Activism Defense. The world of shareholder activism can be a daunting place for managers of public companies. With both the number of campaigns and the volume of assets held under management by activist investors on the rise, having an actionable takeover defense plan in place has become a vital component of being a public company. This is especially true for post-deal SPACs, as their small size and potential for operational missteps early on can be blood in the water for the sharks of the investment community. As with many strategic components of effective investor relations, preparedness is the cornerstone of success. To ensure our clients are fully prepared for the unexpected, Alpha IR offers a tailored activist preparedness program to our clients that is regularly updated for the changing realities of Wall Street and your company’s vulnerabilities.
We are always happy to speak with sponsors, management teams, IR professionals, and others who want to learn more about SPAC and investor relations challenges. To speak with one of our team members on any topic, please do not hesitate to contact us directly.
About Alpha IR Group:
Alpha IR Group is a full-service investor relations consulting firm that partners with companies to deliver best-in-class investor relations, from strategic insights to daily, tactical execution. Alpha IR offers a range of tailored programs, as well as sophisticated insights and significant experience with activist preparedness, investor day preparation and execution, earnings support, M&A/transaction support, perception studies, and more. The firm’s leaders have over 100 years of combined sell-side, buy-side, investment banking, and IR consulting experience. The firm has offices in Chicago, New York, and Boston. Alpha’s growing staff supports a client base that spans seven industry verticals and represents nearly $100 billion of equity value trading on public exchanges in North America.
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