Commissioning a Reputable, Independent Securities Firm is a Viable Means to Obtain It
By: Peter T. Sidoti, CEO, Sidoti & Company, LLC
A Conundrum for SPACS and Their Shareholders
Perhaps the biggest single sensation in the securities markets in the past two years has been the emergence of special purpose acquisition companies (“SPAC”), which raise funds for the sole purpose of acquiring an as-of-yet unidentified company; this essentially allows the target to bypass the much more cumbersome and lengthy IPO process. Many shareholders have embraced SPACs because of their optionality and a somewhat riskless feature. Specifically, any SPAC equity holder that does not believe the acquisition will provide sufficient value can vote “no” to the deal and receive back the original investment plus the treasury yield. SPAC equity holders that think they will receive value can vote “yes” and will hold shares post-transaction if the vote succeeds. For most, the decision as to how to vote is dictated by the SPAC share price immediately before the shareholder vote. If the share price is above the SPAC’s IPO price (usually $10.00 per share), it indicates that the buyside believes the acquisition will result in share price appreciation. Conversely, a share price below $10.00 means investors may have reservations about the target’s potential and therefore may be inclined to take the “risk-free” route to exit their investment.
The founders of a SPAC, who are the only ones who can receive up to 20 percent of the acquired company upon the acquisition as “sweat equity,” face a conundrum. They have intricate knowledge about the merits of the acquisition which they would like to impart to the market prior to the shareholder vote, however, they are not viewed by the investment community as an unbiased source of information. SPAC founders lose their independence because of the massive economic benefits they receive if an acquisition succeeds even if the shares of Newco (SPAC + Target) trade below the SPAC’s IPO price; shareholders who bought the SPAC in such a circumstance could incur capital losses. Realizing this, regulators are considering various measures to mute SPACs, which are currently able to publish financial projections, but have come under suspicion due to a perception that they are abusing a loophole in securities laws that prevents companies that are going public (i.e., an IPO) from conditioning the market through the issuance of forecasts.
Given the foregoing, SPACs and their voting shareholders are asking how information about the merits of a proposed SPAC acquisition can best get to the investment community from a credible, independent source.
The Solution Lies in Commissioned Equity Research
For generations, credible, independent securities research has assisted investors in making more informed decisions about the value of securities, including the potential impact on share prices due to major corporate events, such as acquisitions, divestitures, restructurings, refinancing, and other situations. While one might think that the major investment banking firms advising on the SPAC acquisition (and attendant private investment in public equity [“PIPE”] financings that often accompany a successful merger) would be obvious candidates to provide equity research, given their intimate knowledge of the transaction, they are precluded from doing so. These brokerages receive seven or eight figure fees for advice upon a successful outcome of a SPAC acquisition. Any research these firms produce that is viewed as promoting the deal could flout securities laws and jeopardize a massive investment banking payday. Fortunately, there is a solution: SPACS can commission a reputable independent securities firm to provide equity research without any express or implied guarantee that the research provider will render a favorable opinion about the proposed acquisition. To be sure, one could question the independence of a securities firm that is getting paid by a SPAC for SPAC research coverage. However, in our experience, investors have come to realize how unlikely it would be for an established, credible, and regulated brokerage to tarnish a hard-earned reputation for a sub-$50,000 payday, only a fraction of which hits the bottom line given the very high costs of providing research coverage. Moreover, investment professionals are accustomed to the “commissioned research” model, as companies routinely pay Moody’s, S&P and Fitch for ratings in the debt markets.
Sidoti & Company’s Experience
In January 2021, Sidoti initiated research coverage on Mountain Crest Acquisition Corporation (“MCAC”), which had agreed to buy PLBY Group, Inc. (NASDAQ: PLBY). In his first two MCAC pieces, one of our highly experienced analysts provided corporate and transactional commentary, which was supported by earnings models, EPS estimates and price targets. At the same time, our salesforce interacted regularly with the institutions that we believed were most likely to wish to hold MCAC/PLBY shares post-acquisition (i.e., those looking to buy shares of the SPAC so they could have a say in the shareholder vote). The merger was ultimately approved by shareholders* and Sidoti will continue to provide PLBY equity coverage on a commissioned basis for at least the first four quarters following the successful combination.
Sidoti believes commissioned research will become an increasingly important factor in the SPAC world. Why? In the several months following our publication of MCAC/PLBY research, we have held discussions with various SPAC sponsors who learned of our initiative and have found that many have a favorable view of the commissioned research model. The individuals we spoke with (i.e., the SPAC founders) have a very high degree of financial sophistication and were able to raise capital for a SPAC because of their successful business backgrounds. With SPACs coming under increasing regulatory pressure because of perceived conflicts, we believe these professionals understand the need to provide their shareholders with a credible, independent source of information about an impending transaction. In our view, the secret to success is to commission research from an established, ethical, and reputable research provider that has the respect of the entire investment community.
About Sidoti & Company, LLC
For over two decades, Sidoti has been a premier provider of independent securities research focused specifically on small- and microcap companies and the institutions that invest in their securities, with most of its coverage in the $50 million-$4 billion market cap range. The firm’s approach affords companies and institutional clients a combination of high-quality research, a small- and microcap-focused nationwide sales effort, broad access to corporate management teams, and extensive trading support. Sidoti serves 500+ institutional clients in North America, including many leading managers of portfolios with $200 million to $2 billion of AUM. Sidoti promotes meaningful interaction between issuers and investors through its conferences (www.sidoticonference.com) and the hundreds of non-deal roadshows hosted each year.
* Sidoti makes no representation or warranty that its SPAC research will (a) provide a favorable opinion about an equity or a contemplated transaction, or that its research will in any way be supportive of an equity or a transaction; (b) prompt any investor or investor class to invest in SPAC shares pre- or post-merger; or (c) otherwise lead to a successful shareholder vote. Sidoti also makes no representation that its SPAC research led to a favorable outcome of the MCAC/PLBY shareholder vote for MCAC or otherwise assisted MCAC and its stakeholders.
Contact
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