The SPAC-tacle of it all

The SPAC bubble is not exactly bursting but it is definitely losing all its air. For all the SPACs that have IPO’d but not yet found a deal, the music is stopping and there are no chairs left. For the companies that did get acquired by a SPAC welcome to getting painted by the Market’s Broad Brush. Bloomberg says the average SPAC has fallen 26% over the last two years, by comparison the S&P 500 is up 3% over that period. And from what we can tell, this applies to every SPAC, they are all down, from the legitimate companies to the… let’s call them highly speculative names (some of which are down 60+%).

What do the good companies do now? They are going to carry that SPAC label for a while, and it is unlikely that SPACs’ reputations are going to improve any time soon. We wrote about some of this back in January and February of last year, with some fairly prescient titles. We had no idea that the market would tank this year and take all the SPACs with it, but we clearly felt that a lot of SPAC deals were setting up the resulting companies for some tough times. Which have now arrived.

The good news is that they are not the first companies to face this problem. Every company that has had an IPO eventually hits rough times, and often that comes soon after the IPO. Fortunately, there is a playbook for coming out of these situations.

We know this because we wrote it. A Practical Guide to IPOs. Available on Amazon.

“Chapter 16: Five Years in the Wilderness. KEY LESSON: The only way to recover from a broken IPO is a string of good results – and a lot of time.”

For many SPAC targets, the big problem they know face is that at the time of their acquisition they set expectations too high. At the time, this might of made sense, although it probably made the most sense to the bankers putting the pitch materials together. We strongly suspect that a lot of companies first determined their acquisition price, and then backed into a forecast that would justify the valuation. To put it mildly, that is not a recipe for success.

So the first thing to do now is throw out the old model. Delete it from the server, and make it a firing offense for anyone to refer to it again. Then pull together the real model. The one used to set production targets and incentivize the salesforce. If this does not exist, ask the CFO, or the head of sales, or the head of operations, they have one in a desk drawer that they refer to when no one else is looking. Determine how predicative that model is. Refine it, get input from the whole executive team. Once the model is ready, discount it by 20% – this is now the guidance for the Street.

Next get ready to communicate it to the Street. Start formulating a new story. What is the future of the company, future = the next two years (the five year model has been expunged to the memory hole). What are the product/customer/tech goals for the company? Put together a good vision for the company’s actual business. And be sure to talk to the marketing department, plan out their calendar of news events. There will never be enough, so stagger the press releases and events over the next six months.

Once all those pieces are ready – the new model, the future story, the marketing calendar – get ready for the roughest earnings call possible. Put out the new guidance, not the full model, just the next quarter, plus some commentary about the outlook for the next twelve months, avoiding specific numbers. The SPAC underwriters’ analysts will be polite and ask polite questions, but that hollow, stunned tone to their voice is barely masking the fact that they are unhappy. Now the temptation to talk about all the good things planned will be immense. Resist that urge. Just make one positive announcement about customers, or talk about some new market the company can tap into. Save the rest of the news for the next six months’ marketing calendar. The after-hours investor calls will be brutal. People will swear, someone will probably hang up. Try blaming the war in Ukraine, inflation, the US government, or the Chinese government, but do not try too hard, no one will believe it. In all of this, sound humble but optimistic. Acknowledge everyone’s disappointment, but hold the line on the fact the underlying business is still good and there is cash in the bank. Muddle through it.

Now comes the easy part – hit your numbers.

Remember, the new model has a 20% discount to it, which should be plenty of cushion. Start putting out good news, every week or two if possible. When the next quarter comes, beat the guidance by a bit and raise the guide by 5%. That still leaves 15% cushion. Do that again the following quarter. Keep commentary realistic and do not get too upbeat, one or two good quarters does not qualify for an exit pass from the dog house. In the event that numbers turn out much better than expected, do everything legally and ethically possible to bring them down before reporting. Numbers should be good, but a blow out will just raise unreasonable expectations.

Keeping beating and raising for a year. Now the company is on a new trajectory. The communications and press release strategy will start paying off. After that first year, maintain the new model discipline. Always discount expectations to leave room for things to go wrong, because they will, but after a year it is safe to start talking about longer term prospects, about vision, to start giving people a reason to be excited by the stock. Some investors will never come back, but the buyside can be very transitory, so there will be a whole new audience of investors out there who will not remember the bad days. The company will start to be seen for its business prospects and not as a failed SPAC.

There is obviously a lot of nuance to be added to this. (Contact us if you would like some of that.) The key to all of this is credibility. The company burned through a lot of it, and now needs to take time to rebuild it. This is very hard, and not everyone can make it, but there is a path out.

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