9/14/21, 10:19 PM 5 Considerations in Divesting a Carveout to a SPAC - WSJ

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GOVERNANCE

5 Considerations in Divesting a Carveout to a

SPAC
With a limited timeline to make an acquisition, SPACs are searching for private businesses to take
public. Large organizations can leverage the trend as an opportunity to divest a portion of their
businesses.

In the current active M&A market, a significant number of special-purpose acquisition

companies (SPACs) are competing to take a limited number of attractive private company
targets public. The search by SPACs for such targets is leading to discussions between
SPACs and larger companies about the potential for carveouts. Companies considering
divesting a part of their operations to a SPAC may want to carefully review a variety of
considerations when deciding whether to pursue such a transaction.

SPACs are companies with no commercial operations, created for the sole purpose of
raising capital to acquire a private company and take it public. Under regulatory rules,
SPACs have a limited life span—typically two years—during which they raise money in an
initial public offering (IPO) and take the company public. SPACs are required to comply
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with SEC and stock exchange rules regarding disclosures and corporate governance as
applied to other public companies.

Initially, SPAC transactions were often focused in certain industries, but many deals are
now occurring more broadly across capital markets and globally. Some companies still
target investments in industries such as technology, life sciences, healthtech, fintech,
financial services, or energy, but they are not bound to complete an acquisition within
any particular sector.

Carveouts and SPACS

According to industry data, the number of SPACs that formed and began searching for 1

opportunities spiked in 2020 and 2021 compared with prior years. As of mid-August, nearly
600 SPACs were in search of businesses to acquire, suggesting billions of dollars in 2

funding in pursuit of deals.

Historically, few SPACs have failed to consummate deals and returned money to investors,
leading to increased expectation of a robust deal market in the coming 24 months. While
SPACs are competing for viable target company candidates, many large corporate entities
are searching for ways to rebalance their portfolios, which is helping increase discussions
about potential carveouts. During a recent Deloitte webcast, 22% of participants say they
are considering divesting part of their business in 2021 or 2022.

SPACs offer several advantages over traditional IPOs as a path for companies to access
public markets. Pricing is often more certain because deals are negotiated in advance,
and the time for completing a deal is potentially shorter than for an IPO.

SPACs offer benefits for investors and sponsors as well. Investors have increased
opportunities for involvement and often additional profit opportunities, while sponsors
often experience easier access to capital and increased gains, even if the price of the
target company’s shares drops after the merger.

The accelerated timeline for SPACs can lead to potential challenges in preparing a target
company’s governance and reporting processes to meet initial and ongoing compliance
requirements. For example, SPACs sometimes lack the necessary resources to dedicate to
the change management process. Some SPACs also must work through gaps in talent or
knowledge necessary to meet public company requirements in areas such as financial
reporting, investor relations, or financial planning and analysis.

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Organizations considering carving out a portion of a larger business to engage in a SPAC

transaction can consider five factors that may be important during the process:

Time constraints. The limited time available to a SPAC to identify and complete a
business transaction adds pressure on sellers to accelerate carveouts, including
operationally separating the business being sold and preparing financial statements.
Prospective sellers can evaluate anticipated timelines required for separation under a
potential SPAC transaction to assess timing feasibility.

Separation and day one. A carveout may not have the corporate operating functions and
infrastructure necessary to operate as a standalone public company at the outset.
Organizations can evaluate the types of transition service agreements that the seller might
provide and identify additional resources and infrastructure required to stand up a public
entity.

Spinoff versus SPAC reporting. Financial reporting requirements for SPACs are similar to
those for public spinoffs because both require compliance with public company reporting
standards. However, there are some important differences. Organizations can review and
understand differences in pro forma reporting and projections for an SEC SPAC S-4 filing
compared with a public spinoff under Form 10.

Materiality. Carving out an entity from a larger entity can lead to different materiality
thresholds for purposes of auditing and internal control, which may result in significant
additional audit and control work and scrutiny. It can be prudent for prospective sellers
to evaluate control structures and Sarbanes-Oxley requirements affecting the carveout
and additional procedures that may be necessary.

Counterparties. Divesting a carved-out entity to a SPAC involves negotiation that is not

typical with a traditional spinoff. Selling price and terms can become levers to influence
the diligence process and direct interactions with potential buyers. Organizations can
prepare for the diligence process by understanding buyer motivations and areas of
interest. This includes evaluating relevant financial metrics and mapping goals for
negotiating certain deal terms, such as transferring employees, supply agreements, and
working capital targets.

The time required from deal announcement to close can vary considerably based on the
readiness of the operating company. Carveout procedures can add a few months to the
process, but they can be performed concurrently with diligence activity to shorten the

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timeline. SPACs are often sensitive to timeline considerations because of their limited life
span, during which they must complete a transaction or return funds to investors.

In preparing a business to become public, organizations typically need to focus on several

areas. Operational and public company readiness is critical, including corporate
governance, internal controls, financial reporting, technology and data separation,
incentive programs and employee engagement, and transition service agreements.
Additional areas requiring focus include financial statements and tax considerations, legal
and regulatory issues, and transaction planning. Defining the strategic narrative with
business plans, market positioning, investor theses, and key performance indicators is also
an important step.

As SPACs continue to form and pursue opportunities to take private businesses into capital
markets, they are creating a new, non-traditional path for companies that are looking for
ways to divest a portion of their business. Organizations that want to reach an agreement
with a SPAC can take note of both the risks and opportunities associated with these
transactions and develop plans to drive organizational alignment and readiness.

—Jeff Bergner, partner, Michael Dziczkowski, partner, David Oberst, partner, Christine
Murphy, managing director, and Nicole Swenson, managing director, all with Mergers,
Acquisitions, and Restructuring Services, Deloitte Risk & Financial Advisory, Deloitte &
Touche LLP

End Notes

1.
SPAC Track, The Stats, as of August 20, 2021.

2. Ibid
PUBLISHED ON: Sept. 10, 2021 3:00 pm ET

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