Embracing new deal dynamics in public markets

This article examines how developments in these areas are increasing the complexity of public market transactions for buyers, sellers and investors alike. 

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 London Stock Exchange Group, 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.” 

Anticipating the demands of activist shareholders 

Activist campaigns have declined noticeably during the pandemic and, in June 2021, were at their lowest mid-year level since 2015.² However, Piers Prichard Jones, Partner, Corporate M&A at Freshfields Bruckhaus Deringer, observes a resurgence in activism in recent months and expects the frequency of campaigns to increase as economic activity recovers from the pandemic-induced recession. 

One area of growing activist focus, even amid a wider drop-off in campaign frequency, has been ESG. According to Lazard, for example, 14% of all shareholder proposals passed in the first half of 2021 related to ESG, a rise from an annual average of 6% over the previous three years.³ 

When it comes to M&A, activist influence is usually manifested not in the conduct of a transaction, but rather in the management decision to sell or buy. To date in 2021, activists have been more likely to oppose management bids to engage in M&A, rather than to push for them.⁴ The most likely reason for this is that shareholders believe that management is unlikely – or unable – to get the price they require. Activist shareholders, then, are demanding better preparation to ensure management derives the maximum possible value from a deal. 

Getting ahead of ‘going-public’ risks 

Whichever transaction route is selected, sellers must set out their stalls as completely and diligently as possible. 

With IP litigation on the rise, assessing IP value and digital risk is not just worthwhile but essential if an IPO is the chosen divestment route. Aon has found that the likelihood of IP litigation increases by 220% when a company decides to embark on an IPO. Another study has found that companies experiencing three lawsuits per year prior to their IPO lose 1.25% of their market value to litigation each year in perpetuity.⁵

“Risk assessment is vital in any type of transaction, but it takes on an added dimension when it’s public,” says Adam Young, Head of Equity Advisory at Rothschild. “You've got a board of directors making representations as to the accuracy of disclosure and the ability of a company to succeed commercially after listing. Every time you make a representation, that carries liability.”